If you want to get as wide of a range of reactions as you can imagine, go ask people who invest money or who have assets what they think about annuities. Generally speaking, annuities are supposed to be relatively safe cash flow payments made annually. Annuities come in many styles, ranging from immediate to deferred, and they can be fixed or variable annuities. And there are many variations in each class. Investors often use annuities to help with cash flow needs, and they are often more than willing to sacrifice upside for the assurances and safety of principal. Annuities also can act as a shield for assets.
The risks of annuities are numerous, and some people have made their living advocating against people buying annuities. There can be issuer credit risk. There also can be, and often are, suitability issues. Some annuities can have such sky-high fees and commissions that some people might think the annuities are just there to rip off unsuspecting investors. Many people do not fully understand annuities, even those who purchased them.
3. Private Companies and Operating Businesses
Millions of Americans own small businesses. Most of these tend to be in services, but they can be manufacturing businesses. There are many business brokers out there to help investors find small businesses to own. And many small businesses are bought and sold directly via friends or family. The point is that you can own a private company or own many of them to help build your wealth over time. These might include owning a gas station, convenience store, small hotel, lawn or pool care company, car wash, widget manufacturing company, or books and record-keeping company. Many people who buy private companies prefer to buy a franchise as well with a set cost, a proven track record and an expected return. Franchises can be easier to sell down the road than many standalone companies. Franchises 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 can take years to sell again or they might never be able to be sold. Another pitfall is that someone has to run the business each day. Many businesses also have too much dependence upon the founder or prior owner, so someone else coming along later might not have an ease of dealing with customers after a change of control. There is the added risk of having to deal with employees and operating costs, which can become more expensive over time. Paperwork, taxes and regulations often scare off what might have otherwise been passive business owners.
4. Art and Collectibles
Millions of dollars have been spent on just one Picasso or Van Gogh painting. Rare antiques and artifacts can sell for hundreds of thousands of dollars. And certain sports memorabilia can be highly sought after. There are other forms of art and collectibles that some people have made a fortune in beyond owning Babe Ruth or Honus Wagner cards. Think about the first Superman comic book, or very old manuscripts and autographs. There are also stamps and rare coins to consider. These all fall under the arts and collectibles category, and they are generally bought and sold by people who already have lots of money.
One of the biggest risks of owning art and collectibles is that beauty is in the eye of the beholder. It is also a game in which the owner has to hope someone else values it even more in the future than they do. Art and collectibles can be very illiquid, and a seller down the road may take all the profit just selling it for you. There are also many fakes, replicas and forgeries being sold as “the real deal” to unknowing buyers. Knowing the pedigree and provenance is important as well. If an item was stolen or if someone was swindled out of it, then they can come after you to surrender it. Collectibles as an asset class also is generally taxed at a 28% rate for the profit upon the sale.