There are a lot of ways to invest. These 7 ways practically guarantee that you will lose money.
No matter your goals, there is a preponderance of ways to invest. You can follow a growth investing strategy or a value investing strategy. You can stick to conservative stocks or take as much risk as you want. You can opt for theme investing in something like clean energy or gold. Or you can follow a general index fund.
Whether you want to hire a broker, manage your own investments, save for retirement, try to strike it rich, get into options trading, or go with long-term investing, there are ways to invest that will meet your needs. Some of these approaches work better than others, at least in our experience. And even though there are never guarantees in the stock market, some approaches to investing don’t require very much work on your part to achieve reasonable long-term gains.
For as many ways as there are to make money in the market, however, there are dozens of ways to lose money. Even beyond the chance that any given stock or index can drop substantially, there are more than a few things you can do that all but guarantee you will lose money. Let’s take a look at some of them, so you can keep your money safe.
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7 Ways to invest that can deplete your portfolio in a matter of minutes
Investment risk is always on a spectrum. And again, there are ways to invest that can move that risk needle in either direction. This isn’t to say that one way is wrong and another is right – that’s largely dependent on your goals and risk tolerance. Generally speaking, increasing your risk also increases your chances of hitting the jackpot. But there’s a certain point where the risk pretty much wipes out any potential for making money.
1. Bet the farm on one or two stocks
There are some differing and quite valid opinions on the necessity of diversifying your stock holdings. Think back to what happened to Enron’s investors about 20 years ago. The stock dropped from just over 90 to 0.26. Enron employees completely lost their retirement funds, and shareholders lost an estimated $74 billion. While you don’t need hundreds of stocks in your portfolio, some diversification will help in the event that one of your stocks crashes.
2. Day trading
If there were only one rule to investing money wisely in the stock market, this would be it: Day trading is little more than glorified gambling. We know that the stock market goes up over time. Day to day, you have no idea which direction the market is headed, and individual stocks can be even more challenging to pinpoint.
3. Ignore risk
Most beginners only think of upside, as opposed to potential loss of money. That often leads to too-large positions and a refusal to get out of losing stocks.
4. Ignore the fundamentals
You don’t need to be a whiz with charts or a student of technical analysis to pick good stocks, but you can’t completely ignore the fundamentals, either. While a stock might have great marketing or lots of press, that won’t keep it in business. You still need to look at things like sales, cash flow, and longer-term growth.
5. Fail to understand a stock
To paraphrase Warren Buffett, if you can’t explain what a company does, you shouldn’t invest in it. It’s relatively straightforward to explain what a beverage company or automaker does. But can you explain in one or two sentences what an acquisition company does? Or a secondary mortgage investment company?
6. Make complicated investments
Depending on your experience, there are ways to invest that can keep your interest and make things exciting. But like complicated stocks, complicated investments aren’t for everyone. Commodity futures and stock options can be great ways to make money, but unless you have a solid grasp on the finer details, it’s best to stick with stocks, bonds, ETFs, and other similar investments. There’s nothing wrong with that, either. Plenty of investors get rich that way.
7. Buy the “next big thing”
Of all the ways to invest, this one might be the hardest to resist. It’s not easy to watch a stock go up substantially without buying into it. Everybody wants that stock that quadruples in price, but rushing into a stock without doing your homework will almost always end in disappointment.
This isn’t to say that you can’t make money with one of these ideas. It isn’t to say you should never buy the “next big thing” or buy the occasional stock that you don’t fully understand. But as a whole, these are the ways to invest that, if you aren’t careful, will land you with losses faster than you can say “Dot-com bubble.”
Of course, a very simple way to avoid these mistakes and discover the best investments around would be to subscribe to one of our 15 award-winning investment newsletters.
In the meantime, what are one of the ways to invest that you would recommend keeping away from? Share your ideas in the comments.