When people first start to look closely at their finances, there’s a certain point at which they often ask themselves, “How can I use the money I have to make even more?” And while this is a great question—one that you should never stop asking!—it can unfortunately blind people to the very real risks involved.
As a result, what started off looking like a sure thing turns out to be a bad investment.
Bad investments can take many different forms, but there are a few that are more common than others. Learn what they are so you can avoid making a financial mistake that derails your retirement plan.
What Are Investments?
An investment is an act of putting money or capital at risk in the hope of gaining income or profit at a later date. Investments are a crucial component of any portfolio, as they provide long-term stability and growth potential. Many different kinds are available, such as stocks, bonds, mutual funds, ETFs, business startups, real estate, and more.
Investments can be classified as short-term or long-term investments, depending on the length of time it takes for the asset to generate income and profits. Short-term investments require a shorter investment time frame and, thus, usually will offer higher risks and rewards.
Identifying Bad Investments
Investing is a risky business and, while there are many solid investment opportunities, there are also numerous ways to invest that can be classified as shaky at best.
Poorly-performing investments often appear promising but won’t yield the desired results over time. In the worst cases, they can leave you in a worse position than when you started.
What are the most common types of bad investments?
- Savings accounts: If your first instinct is to hoard your money for a rainy day, think again. The return rates of savings accounts are so low as to be unnoticeable. Rather than letting your money sit in a bank account, it could be working for you. Savings accounts are not an investment tool. They should strictly be used to keep your emergency funds, as well as the money necessary to pay your daily bills.
- Penny stocks: Penny stocks carry a low dollar value and, often, a high-risk factor. They aren’t traded on any major exchanges and have more volatile price movements. What’s worse, they’re often a vehicle for scammers.
- Multi-Level Marketing (Network Marketing): These are often advertised as home-based businesses that allow you to sell vitamins, oils, household products, and many other products. Unfortunately, the money-making happens in recruiting, not product sales. The highest percentage of participants make no money and quite often spend a lot of money purchasing the products and materials for themselves.
- Timeshares: Timeshares provide people the right to use a specific property for certain times of the year. Sounds like a great idea, right? You’re buying real estate in a luxurious resort where you can also enjoy your vacation. However, you’re not really buying real estate. You are buying fractional ownership in a property that you can only use on a specific date. Ongoing maintenance fees, confusing contracts, and no real market to sell your timeshare in the future make these a horrible investment.
- Collectibles: Buying and selling tangible objects—whether it’s baseball cards or Beanie Babies—is a hobby, not an investment! Sooner or later, the market is going to drop and you will be left with a huge inventory that’s worth nothing.
- Gambling: Sure, playing poker or betting on the horses is exciting, but there are too many ways that this can go wrong.
- Cryptocurrency Scams: Although this can be a legitimate investment, the market’s “newness” is primed for scammers to capitalize on its appeal for people to make fast money. Cryptocurrency is volatile and difficult to understand. In many ways, this is a bad investment for the average investor, especially retirees.
- Lottery: Spending $1 to play the lottery shouldn’t be a problem as long as you understand that this is not investing. Sure, you might be one of the lucky ones who hits the big jackpot, however the odds are stacked wayyyyy against you. Luckily, you’ll only end up losing $1.
- E-mail Phishing Scams: Anyone posing as a wealthy person who needs to get a huge sum of money out of their country and urgently requests your banking information (in return for a share of the money) is a scammer.
Protect Yourself Against Bad Investments
The current investment environment is rife with uncertainty. It isn’t easy to make intelligent investment decisions with so much tension. To avoid making bad investments, you need to be aware of the risks that surround your investments.
The first step?
Educate yourself on evaluating a potential investment before you make a final decision. Below are a few things that investors can do to avoid making bad investments in this environment:
Learn from the past: It’s an age-old adage that studying the past is the best way to predict the future. This is true in business, marketing, and many other aspects of life. So take a look at what’s worked in the past (and what hasn’t).
Be observant: You should also be aware of any red flags that may arise during the investment process. One of these red flags is when a company has not been around long enough for an investor to gauge its market share and its ability to grow in the future.
Get assistance: There’s nothing wrong with turning to the experts. Questions that might take hours of research could be answered by an expert in just a few minutes. If you’re serious about building wealth and planning for the future, a financial advisor will be crucial.
Learn More Today!
Any investment is a gamble, and there is no surefire way to make sure that you won’t lose money. In fact, investors have to be willing to take risks to secure long-term gains.
However, some investments are inherently more risky than others, which means that investors must be aware of the risks they take.
If you’ve started to take steps to prepare yourself for your Golden Years, it’s crucial that your unique concerns and limitations are addressed by someone who knows how to overcome them.
Ready to discover more about how to invest and manage your money more wisely? Call me today so we can talk about your future.