Just as important as finding a good investment is knowing what investments to avoid at all costs. If you simply manage to avoid putting any money into financial sinkholes, you’ll come out ahead. I’ve already mentioned the common mistake of cashing out your 401(k) when moving jobs.

Joshua Brown of The Reformed Broker has some great insights into the sales-driven world of products peddled to us retail investors. He talks about non-traded REITs (real estate investment trusts) as opposed to publicly-traded REITS that you can buy via a low-cost, diversified fund like the Vanguard REIT Index Fund (VNQ or VGSIX). Non-traded REITs have been increasingly popular in the current low interest environment as they are structured to look like they provide a solid income stream.

In this recent post, he shares a hilarious fictional conversation that would happen if the broker was abnormally honest about the fees involved. Read the whole thing, but here’s a snippet:

With your portfolio size and risk tolerance I would recommend a $100,000 investment. Given that amount let’s first go over the fees. If you invest $100,000 I will be paid a commission of $7,000. My firm is going to get $1,500 – $2,000 in revenue share. My wholesaler, the salesman that works for the investment’s sponsor company, will get $1,000. He is a great guy, buys me dinner all of the time and takes me golfing. The sponsor company is going to get around $3,000 to pay for some of the costs they incurred in setting up the investment. So all in on Day 1 there will be around $87,000 left over to actually invest. I bet you are getting excited.

You hand over $100,000, and after everyone has gotten their cut, there is only $87,000 actually left over to invest in anything. It doesn’t matter what property they buy, the odds are completely stacked against you already. Studies have shown that publicly-traded REITs have higher historical returns than non-traded REITs. On top of that, non-traded REITs have poor liquidity and you may be locked in for 5 years or more. Despite all this, over $20 billion of non-traded REITs were sold in 2013.

Here’s a Reuters article by James Saft that goes into more detail about the many disadvantages of non-traded REITs. Amongst the more amusing excerpts:

When a financial advisor tried to sell my sister a fee heavy non-traded REIT last year, pitching it as an alternative to fixed income, I told her she ought to fire him. […]

The Financial Industry Regulatory Authority, an industry funded oversight body, went so far as to issue an “investor alert” about non-traded REITs in May of last year, warning about inaccurate and mis-leading marketing of the vehicles as well as other risks. Just to give a flavor of the company in which non-traded REITs are traveling, the most recent FINRA investor alert was about marijuana stock scams.

Bottom line: Avoid non-traded REITs. If you want commercial real estate exposure, buy a low-cost fund like VNQ or VGSIX.

There was a lot of good discussion in my lengthy early mortgage payoff post. Now instead of lengthy details, let me try out a quick rule of thumb about early mortgage payoff. Recall from Wikipedia:

A rule of thumb is a principle with broad application that is not intended to be strictly accurate or reliable for every situation. It is an easily learned and easily applied procedure for approximately calculating or recalling some value, or for making some determination.

So roughly applicable to many – but not all – situations.

Early Mortgage Payoff Rule of Thumb

You should time your mortgage payoff date to coincide with the date of retirement, or semi-retirement. Here, I would define retirement or semi-retirement as a time when you’ll be wholly or partially dependent on non-work income like Social Security, pensions, annuity payments, stock dividends, or other investment income. A downshift into a lower-paying second career would count as a semi-retirement.

In my humble opinion, this quick and dirty rule will help you balance the opportunity to invest in potentially higher-returning investments (stock mutual funds, dividend-paying stocks, real estate, high-yield bonds) with pursuing the benefits of having a fully-owned house (less stress, less leverage, lower required monthly expenses, lower required withdrawals from investments and thus lower marginal tax rates).

Example 1. 20s, 30s, 40s with long future career. You love your job and/or want to be doing it for the next 25+ years. In this case you have lots of human capital and a regular stream of income. You also won’t be needed to cash out your retirement assets for a long-time, making it much more likely that your stocks will achieve their higher average returns. Take on the 4% interest rate fixed for 30 years, and over time your salary will rise with inflation while your payment stays the same.

If anything, you could do a DIY biweekly payment plan and pay off your mortgage in under 24 years with less “pain” due to a behavioral trick (works best for those on a biweekly paycheck schedule).

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In the world of personal finance, you can always generate a good debate if you talk about paying off your mortgage early. The argument usually boils down to something like this:

If your interest rate is 4%, then paying extra towards that mortgage will earn you 4%. If you think you can earn more than 4% elsewhere, then don’t pay off your mortgage.

However, when it comes down to if YOU should pay extra towards YOUR mortgage, the above statement is an oversimplication. As Einstein is credited with saying, “Make everything as simple as possible, but not simpler.”

Since I am faced with this decision myself, let’s address the implied assumptions in the sentence above and all the other little details that go into the decision.

Warning: This is a braindump post and thus rather long and detailed…

Assumption #1: Your mortgage interest is 100% tax-deductible.

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