Good investments build wealth, while bad investments destroy financial stability. People in the early stages of their financial journey may struggle to tell the difference.
Avoid these risky investments for the best chance of financial security.
The Worst Investments for Beginners
Bad investments for beginners may be stellar opportunities for seasoned professionals. They range from risky investments to complex packages while also including scams, “hot” investments, and other questionable ventures designed to separate you from your hard-earned cash.
Risky Investments
Every investment has risk, but some are far more harrowing than others.
Risky investments offer immense awards, but with great potential rewards come a greater risk of loss. They include things like new companies, penny stocks, and cryptocurrencies.
Some risky investments are like gambling. You put money in with the hope of winning big, but the possibility of losing it all is ever-present.
Beginners typically don’t have money to lose, so they should avoid overly risky investments.
Complicated Opportunities
Never invest in an opportunity you don’t understand. Although you can invest in options, futures, short selling, SPACs, and various other asset classes, you shouldn’t unless you completely understand what you’re buying into and why.
Beginner investors should stick with mutual funds and index funds, which are easy to understand. They can graduate to individual stocks and explore more advanced investment opportunities when they gain confidence.
Scams and More
The worst investments aren’t investments; they’re scams with shiny bows making them look like investments. The worst investments also include “hot” tips and emotional investments, like when your beloved uncle asks you to “invest” in his company.
What Makes an Investment Bad For Beginners?
Although risk, complexity, and legitimacy are the most crucial considerations that make investments “bad” or “risky,” there are other items beginner investors should look out for before deciding where to invest their money.
The initial cost and rate of return make some investment opportunities unfavorable for people in the beginning stages of their investment journeys.
Initial Cost
The worst investments for beginners have high buy-in costs, making it nearly impossible for beginners to grow wealth.
If you can only afford one share of a specific asset, you’re unlikely to see enough gains to impact your financial security.
Low Returns
People in different stages of their investment journeys have different goals. Beginners are likely attempting to build wealth, while people nearing retirement want to preserve the wealth they’ve gained over their lives.
Safe investments with low returns are awful for beginners but ideal for those with massive nest eggs.
The Worst Investments for Beginners – Examples
The worst investments for beginners aren’t bad investments for everyone.
Here are some investment opportunities beginners should avoid that work well for seasoned investors.
Individual Stocks
Individual stocks create the stock market and fill our mutual funds. Many include solid companies with strong fundamentals. They’re excellent investment opportunities, but not for beginners.
Good stocks are expensive, meaning you need a lot of capital to invest to grow wealth, and even great companies come with risk.
Expensive
To grow wealth with stocks, you need to buy a lot of them, and good companies are costly.
A single share of Microsoft costs nearly $400. To make any real money with dividends and investment growth, you need at least 100 shares (though 1000 is much better).
You’d need $40000 for a solid investment in Microsoft.
I use Microsoft as an example because I experimented with buying a single share.
I bought my share nearly 14 years ago, when it was only $26 per share. After paying $12 in brokerage fees, my total investment was $38.
Today, that investment is worth approximately $460. I made a little over $400 over 14 years.
Think about how much money I would have made if I bought 100 shares. Unfortunately, I only had $100 to invest at the time, so the most I could have bought was two shares, as you can’t purchase partial shares of individual stocks.
Some beginners could afford to throw $2000 into a $26 stock to reap the benefits of growth, but they still shouldn’t, for the second reason why individual equities are bad investments for beginners.
Risky
Buying individual stocks creates more risk than buying into index funds.
Companies get bought out and sometimes go out of business. There may be an economic crash affecting entire industries or technological changes rendering specific sectors obsolete.
Imagine investing all your money in a company like Circut City and watching it crash into insolvency. You’d lose everything.
We never know what’s on the horizon, so investing all your eggs into a single basket is a recipe for disaster.
What Should You Do Instead?
Instead of investing in individual stocks, put your money in low-cost index funds. Index funds combine groups of equities into one fund, so you’re getting instant diversification with your investment, decreasing the risk of losing everything (though it’s still possible – no investment is entirely risk-free).
Many index funds offer the opportunity to buy in regularly with automatic investments, allowing you to purchase partial shares and avoid a brokerage fee.
You can buy $100 worth of your chosen index fund every paycheck and never worry about paying brokerage fees or not having enough to afford a share.
Vanguard’s total market fund is my favorite, as it is low-cost and allows automatic investment (once you reach the $3000 minimum investment threshold). Those who don’t have $3000 can buy the same fund as an Exchange Traded Fund (ETF) on the open market.
Bank Accounts
Risk-averse investors squirrel money into bank accounts and Certificates of Deposit (CDs), but these vehicles aren’t ideal because they aren’t investments. They’re safe havens.
The problem with sticking to checking accounts, savings accounts, and CDs is that most of these accounts won’t beat inflation. For most of the 21st century, interest rates were staggeringly low, and most people didn’t earn any money on their savings.
Though interest rates have risen in the past few years, high-yield savings accounts still only pay around 4%, which is excellent for preserving wealth but not ideal if you hope to beat inflation.
What Should You Do Instead?
It’s hard to risk money, especially when you have so little. Unfortunately, there aren’t any risk-free investment options that beat inflation.
Those who refuse to invest should find a high-yield savings account, but it’s not ideal. Instead, you could explore investing in bonds, which are a little safer than stocks but still carry risk, or let go of the scarcity mindset and allow yourself to experience growth.
Risky Investments To Avoid
You should avoid these risky assets unless you’re a seasoned investor with money to spare.
Penny Stocks
Penny stocks are low-value companies. They’re trading below a dollar a share (hence the name), meaning they have poor fundamentals and questionable stability.
People invest in penny stocks for the high potential award. Imagine buying 1000 shares of a floundering company for 20 cents, then watching the company grow into a massive giant with shares worth $200. You’ve made a fortune!
Unfortunately, most penny stocks won’t explode. They typically don’t pay dividends and are at high risk for failure.
The uber-wealthy trade in penny stocks because they can afford to buy a million shares for twenty cents and sell them when they’re worth 30 cents. Middle-class investors can’t afford that.
Real Estate
Finance influencers around the internet claim real estate investing is the secret sauce to wealth. While real estate is an excellent investment, it’s not ideal for investors because it carries too much risk.
If you don’t know much about houses, you risk buying a money pit. In addition, many hidden costs are involved in buying real estate and making it suitable for renters. People who make great money in real estate have capital to invest and pay for all the problems that inevitably arise. Without that capital, a real estate investment may morph into a financial disaster.
Cryptocurrency
Thousands of voices claim crypto is the best investment of our lives. There’s nothing wrong with investing a little into crypto but think of it as a gamble.
The cryptocurrency market is completely unregulated, meaning it’s easy for unscrupulous players to take naive investors for all their money.
If you want to invest in crypto, do a lot of research first, and don’t listen to anyone online who’s trying to tell you a particular currency or platform is “hot.”
Bad Investments for Everyone
The worst investments are bad for everyone. I hesitate to call them “investments” because they aren’t, but people online trying to get your money will claim they are.
Logic, rather than emotion, is vital when deciding where to invest. There are no get-rich-quick schemes, and anyone trying to tell you that you’ll “make a fortune fast” is lying to get your money.
Some examples of these bad investments are a friend’s fantastic investment opportunity, a “hot” tip you heard online, something you need to buy RIGHT NOW, pyramid schemes, non-reputable investment firms, and companies that rely on affiliate links.
Do a lot of research before investing in anything.
Investments are long-term. If someone is trying to appeal to your FOMO (fear of missing out), they probably know it’s a lousy opportunity and don’t want to allow you to research. Hot tips usually aren’t “hot” anymore after they leave Wall Street.
You should rethink the opportunity if you’re doing online research and can only find affiliate links rather than legitimate reviews. A reputable company should have a genuine website, real investors, and genuine reviews.
Avoid Bad Investments To Grow Wealth
All investment carries risk, but avoiding the worst investments will mitigate that risk and help you grow wealth.
Great advice! I’m a long time financially independent and early retired investor and I don’t buy individual stocks for the very reasons you listed. I think they are fine for experienced investors but I tried them in the past and did not like the amount of effort that went into finding good stocks or the feelings I had when one of my purchases tanked.
Yeah it’s super hard to find good ones that pay dividends. And when you find them, they are expensive! That’s why I think beginner’s should stick with index funds. Thanks for stopping by!