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!). They are definitely things to research and consider when you achieve intermediate investor status. However, as a beginner, these are things you should steer clear of until you have a bit more investing experience.
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:
Sure, you could buy penny stocks for decent prices, but those are terrible investments (they are more of a gamble). 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!
Story time! 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!
Investing in Stocks
Because of those three things, I wouldn’t recommend investing in individual stocks until you are fully reaping the match of your employer sponsored account and invested in some low-cost index funds. I also would recommend getting familiar with the market before making any stock investments. 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 some individual stocks. Start with highly reputable companies that pay dividends.
Bank accounts (checking and savings) aren’t 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. Having liquid cash in accessible accounts is extremely important, but it’s not going to make you any money. Therefore, its not a good investment.
Are you extremely risk adverse but looking for better gains than a bank account? Well I have two options for you!
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 shorter term CDS (as short as 3 months) and longer 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 way safer than stocks. 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.
Shady things are 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 a piece of 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.
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!