Bad Investments for Beginners
As a companion piece to our Beginner’s Guide to Investing, I thought it would be nice to flip the script and write about some bad investments for beginners. Keep in mind, none of these are bad investments in general (except the shady ones at the end!).
Most of the investment ideas here are great things to research and consider when you achieve intermediate investor status. However, these are bad investments for beginners because they can be a bit complicated, expensive, or risky. If you’re interested in investing in any of these products, go for it, just do tons of research first!
What Makes an Investment Bad For Beginners?
Investing for the first time can be scary. There are so many options, and everyone has an amazing hot tip for you. It can be hard to figure out which ones are legitimate and which ones just want to take your money.
That’s why there are some investments that are just generally bad for beginners, even if they aren’t bad investments overall. Here are some of the things to look for to see if an investment is bad for beginners.
A high initial cost is something that usually makes an investment bad for beginners. Unless you are already wealthy, you probably don’t have a lot of money to invest when you are just starting out. Buying individual enough of any individual stock to make a difference in your portfolio might be out of reach.
Another thing to stay away from as a beginner investor is high risk investments. The goal is to make money, not to gamble, right? So that brand new Initial Public Offering looks like a great deal, but are you really willing to gamble the little bit you have to invest on something without good fundamentals?
Plenty of people make tons of money on shorts, longs, commodities, and other different types of investing methods. I don’t even consider myself an expert, but I wouldn’t touch any of those things. They are all very complicated, and I don’t actually have the time to learn what it all means. Stay away from investments you don’t understand.
Sometimes an investment is bad for beginners because you just won’t be able to make any money out of it. Is it really an investment if you aren’t even making enough to beat inflation? What is the point of investing if not to grow your wealth?
Examples of Bad Investments for Beginners
I have a few individual stock holdings, so don’t take this to mean that buying company stock is a bad thing. It’s not! It’s an awesome thing! I don’t think they are the best investment for beginners for a couple of reasons. They are expensive, it’s hard to make money off them, and they can be rather risky. That hits two of the three things to avoid as a beginner!
Sure, you could buy penny stocks for decent prices, but those are terrible investments (they are more of a gamble than investment, in my opinion). If you are going to buy individual stocks, you need to focus on strong companies that pay dividends.
Unfortunately, these stocks usually don’t come at bargain basement prices. In addition, you have to pay a brokerage fee every time you buy and sell, and you can’t set up automatic investing (Well, I’m sure there are websites that let you do that, but it will cost you the brokerage fee each time, and that’s ridiculous).
Not Worth it Unless You Have Lots of Capital
Not only are individual stocks expensive, but you need also need a lot of them to see any investment gains. You have to buy at least 100 shares to see any real gains, even on dividend paying stocks. And 100 shares of a quality stock can get crazy expensive!
I bought 1 single share of Microsoft stock back in 2010 (ish) for about $26. You know what that stock is worth now? Seven years later, that single share swelled into a whopping 1.25 shares!! And my investment gains are sitting at around $70! Can you imagine how much money I’ll make off this investment in another 20 years if the market keeps going the way it is? You guessed it: Not much.
So why did I buy it? Honestly, I was just trying to experiment with buying stocks. I had maybe $100 bucks to invest, and instead of putting into a mutual fund, I decided to try my hand at the stock market. So, I bought 1 share of Microsoft for a quarter of my money, then I bought a bunch of useless penny stocks. I guess I got back to my initial investment with Microsoft, so it wasn’t a total loss.
Non-dividend paying stocks are even worse. You could buy 100 shares and never see any investment gains. The one positive side about the Microsoft stock is that it pays dividends, so eventually I’ll have 2 whole shares, and eventually that will grow into more shares. I’ll have something to leave to my niece and nephew, because it may actually be worth some good money by the time they retire.
Another big drawback to buying individual stocks is that they come with a huge amount of risk. Sometimes companies get bought out and sometimes they go out of business. There may be an economic crash that certain companies just can’t recover from (who remembers Circuit City?) You can risk losing your entire investment if the company that you picked goes bankrupt. You can also lose your entire investment if the company you picked ends up on an episode of American Greed. It sounds funny, but it seriously happens!
What Should You Do Instead?
Instead of investing in individual stocks as a beginner, try investing in some low cost index funds. My favorite is Vangaurd’s total market fund – you can automatically invest and you are automatically diversified.
If your heart is set on investing in individual stocks, you should definitely familiarize yourself with the market first. Sign up for Investopedia’s free stock market game and practice investing with virtual money. Once you have it figured out, take some real money and pick high performing individual stocks. Start with highly reputable companies that pay dividends, and only consider high-risk high-reward stocks (aka gambling) after you have everything else set.
Bank accounts (checking and savings) are examples of “investments” that are terrible for beginners because of the low returns. In fact, they aren’t even really investments. They are safe havens for your money. If you live in the US and have under two hundred and fifty thousand dollars in the bank, all of your money is insured by the FDIC even if the bank goes under (the only exception would be if the United States collapses, and if that happens I’m pretty sure we will have more serious problems). So bank accounts are awesome safe places to store your money.
Unfortunately though, we are living in a time of low interest rates. According to Bankrate the national average interest rate on savings accounts is just under 1%. That’s ridiculously low! You won’t even beat inflation with that!
Now I’m not saying not to store money in the bank. They definitely have their place (hello, emergency funds!). Having liquid cash in accessible accounts is extremely important, hell, I have a bunch of bank accounts! But none of those bank accounts are making me any money, so they aren’t good investments.
What Should You Do Instead?
Unfortunately if you want safety, your options are extremely limited. There are a few high-interest checking accounts available, but even with those you are only making a maximum of 2% in interest. Your best bet is to build your emergency fund at the bank, and then start investing your money in a low cost ETF.
There are two other options if you are extremely risk adverse. I don’t think they are the best investments for beginners, because you get such low rates, but they do offer more safety than other investments.
CDs are very similar to bank accounts, but they usually pay a little bit more in interest (though with interest rates so low, they have been fairly close in recent memory!). CDs are long term investments though. The bank is agreeing to hold your money and pay you a higher interest rate than you would get with a savings account, while you are agreeing to not withdraw your money for the life of the CD.
There are short term CDS (as short as 3 months) and long term CDS (3 or more years!). In general, you will get higher interest rates with longer terms. You will also find higher rates on the CDS with higher minimum investment amounts. The best CDs are paying about 2.5% interest right now, and while that it better than nothing, it probably isn’t enough to beat inflation in the long run.
Bonds are basically loans. There are two types, corporate and government. When you purchase a corporate bond, you are lending money to a company. When you purchase a government bond, you are lending money to the government.
Bonds are much safer than stocks (but remember, no investment is ever without risk!). They are a great investment that helps keep large portions of money safe while still offering a bit of growth to combat inflation. Unfortunately, safety comes at a cost. You won’t grow your money very well if you invest in bonds. This investment type is best for someone who is close to retirement age and wants some protection against market volatility in their final stretch. It’s a bad investment for beginners.
What Are Some Bad Investments for Everyone?
There are some shady investment schemes out there, and I call those bad investments for everyone, not just beginners. But when you are just starting out, it may be harder to spot the red flags. Some examples of shady investments are: a “hot tip”; a friend’s amazing business opportunity, pyramid schemes, non-reputable investment firms, and companies in which the only information you can find about them are obviously affiliate links (you’ll know them when you see them!).
It’s unfortunate, but there are tons of people out there trying to get your money in nefarious ways. My recommendation to avoid this is to always do your research and utilize well established, highly rated firms for all of your investment needs.
What Bad Investments am I Missing?
Does anyone else have any examples of bad investments for beginners? Let us know in the comments and lets all partner together to help each other achieve financial independence!