The risks of annuities are numerous, and this will only scratch the surface. There can still be issuer credit risk, like default. There are limits to how much an annuity is insured for, generally considered to be $250,000 or $300,000. There can be and often are suitability issues. Some annuities can have such high fees and commissions that they look like they were built just for salespeople who enjoy high commissions. Other investors think annuities are just there to rip off unsuspecting investors. Many people do not fully understand annuities, even those who purchased them. If they have annuities with index ties, they often feel left out if the market rises 20% and they make only 5%.
3. Private Companies and Operating Businesses
Millions of Americans own small businesses. Most tend to be in services, but they can be manufacturing businesses as well. There are many business brokers out there, but many businesses get bought and sold directly via friends or family. The point is that you can own one private company or many private companies. You can own a gas station, convenience store, small hotel, lawn or pool care service, car wash, widget manufacturing company, book-keeping and records-keeping company, and on and on. Many people who buy private companies prefer to buy a franchise because it is proven, has a turnkey plan and hopefully can be sold down the road easier than most companies. These also can be considered “cash cows” because they kick off so much income to the owners.
The risks of investing in private companies and other operating companies are numerous. They may take years to sell again or they might never be able to be sold. Another pitfall is that sometimes (or always) you will have to be the proprietor in charge of running that business each day. Many businesses also have a lot of ties to the founder or prior owner, so someone else coming along later (that may be you!) might not have the ease of running and dealing with customers as would have normally been the case. Then there is the risk of people (labor) and operating costs, all of which can rise handily ahead. Paperwork, taxes and regulation often scare off what might have otherwise been passive business owners.
4. Art and Collectibles
Chances are pretty high that you heard of millions of dollars being spent on Picasso and Van Gogh paintings. Rare antiques and artifacts can sell for huge amounts. Ditto for the famed Honus Wagner baseball card that is so scarce and so sought after. What about the first Superman comic book, or what about manuscripts and autographs? Then there are stamps and rare coins to consider. All these fall under the arts and collectibles, and they are generally bought and sold by people who already have lots of money.
One of the biggest risks of art and collectibles is that beauty is in the eye of the beholder, and if you own it you may have been willing to pay more than anyone else at that time. Art and collectibles can be illiquid. Many unknowing investors also have been duped by fakes, replicas and forgeries sold as “the real deal on the cheap.” Knowing the pedigree is important as well — if it is stolen or if someone was swindled out of it, they might come after you for it. Collectibles as an asset class also generally are taxed at a higher 28% rate for the profit upon the sale.
5. Royalty Income Streams
Many individuals own streams of royalty income. In modern days, people might immediately think of royalty payments tied to oil and gas. The reality is that there are many royalties that can be invested in. You can invest in royalty payments tied to gold mining, music, patents or copyright, or even in films and TV. Some investors have even bought royalties tied to clothing lines. Another new royalty stream investment that is available is investing in the rights to future income of athletes. There are exchanges and venues for people to buy and sell royalties.
Perhaps it sounds great owning royalties. They can be very lucrative, but they can also be duds. Many athletes, musicians, brands, oil wells and the like simply fizzle out or die. Some royalties often just suffer from a slack economy, or the future sales do not live up to expectations. Another risk is that there can be legal disputes over what were the real sales or the real income levels that were as the base for royalties.
6. Gold and Silver
The price of gold and silver has risen sharply through time, and it often falls faster than it rose. Still, gold has a history that goes back for thousands of years. The shiny yellow metal has been sought after since the dawn of time. Gold is also a key holding of central banks, and probably every wealthy person in the world has been told repeatedly that they have to own some gold. It easily can be bought and sold now in the financial markets, online or at gold exchange stores. Some gold bugs invest in gold as a future store of value, or because they fear a coming collapse of the monetary system. There are too many reasons to say why someone might own gold. This is the same issue for silver, with even more variations.
Gold does come with risks that you might not normally think about. The numerous reasons people own gold actually make up some of the risks. Industry and technology keep finding new replacements that are far cheaper than gold. When gold gets too expensive, they use less gold in making jewelry. Gold (and silver) will never pay a dividend, and you can’t eat gold if you get hungry or drink it if you get thirsty. Gold and silver also get taxed at the same rate as collectibles, so you generally have to pay 28% on your profits. If the rationale behind gold buying was for barter, whoever is bartering with you may not value that gold very highly or they may bilk you. Then there is the risk of theft or loss.