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Here Are 5 Investments To Avoid If You Want To Be Rich

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Oct 6, 2023 #Avoid, #Investments, #Rich

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Achieving financial success and building wealth is a goal that many aspire to, but it often requires making wise investment choices. While there are countless opportunities in the world of finance, not all investments are created equal.

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You can chase get-rich-quick schemes and risk losing it all — but play it too safe and you can miss out on the returns you’ll need to make your portfolio grow. So just what should you be on the lookout for?

Here are five things financial planning experts say you should never invest in if you want to be wealthy one day.

Penny Stocks

Jeff Rose, a certified financial planner and the founder of Good Financial Cents, warns investors to avoid penny stocks. The term “penny stock” is often used very loosely, but in general it refers to the stock of a company that trades for less than $1 per share and has a very small market capitalization (the total market value of a company’s stock).

Penny stocks are typically listed on smaller stock exchanges or traded over the counter (that’s when a stock is bought and sold directly without the supervision of an exchange).

Strictly speaking, there is nothing inherently wrong with a penny stock — but Rose says investors should be extremely wary of them. Because of the low price of the shares and their illiquidity, they tend to be far more volatile than the average stock.

“It’s easy to get tempted by the low prices,” Rose said, “but they are way too risky and lack the stability and performance of more established stocks to help you build wealth.”

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Commodities

Will Brennan, CFP and founder of Park Hill Financial Planning, recommends staying away from commodities. As an investing term, commodities are static physical goods — as opposed to a stock, which represents ownership of a small piece of a business. Heavily traded commodities include things like oil, natural gas, precious metals and even agricultural products like corn or cotton.

Some investors specialize in trading commodities, but they are also popular as hedges against market downturns and inflation. Brennan points out that this popularity isn’t necessarily based in reality.

“Despite their reputation,” he said, “commodities aren’t the best inflation hedge. Stocks of commodities producers tend to perform better than the commodities themselves during inflationary periods.”

Cryptocurrency

Robert Johnson, chartered financial analyst and professor of finance at Creighton University, shared several investment types to avoid if you’re looking to build real wealth.

The first is cryptocurrency. While the level of hype surrounding crypto has calmed down quite a bit over the last few years, there are still over a million cryptocurrencies out there. As long as there are stories of people striking it rich overnight on crypto, some investors will continue to be drawn to it.

“I can think of few worse strategies than committing investment to cryptocurrencies,” Johnson said. “One cannot invest in the wide array of cryptocurrencies; one can only speculate. There is no rational way to determine the value of Bitcoin or any of the other various cryptocurrencies as one can’t apply the tools of traditional finance to arrive at the intrinsic value of the supposed asset.”

SPACs

A special purpose acquisition company, or SPAC, is a business that is formed solely to raise capital to fund the purchase of another business. SPACs enter the stock market like any other initial public offering (IPO); but, unlike a typical company, SPACs have no business operations. They are simply legal structures that use the capital raised by selling shares to make a future acquisition.

“In layman’s terms, the investors in a SPAC have no idea what company they ultimately will be invested in,” Johnson said. “Essentially, these companies choose to go public via a SPAC to avoid those pesky disclosures required in an IPO.”

Money Market Funds and Treasury Bills

You might be surprised to see T-bills and money market funds on this list. After all, they are among the safest and most secure investment vehicles out there. Low risk is nice, but the flip side of that is a lower reward — and these types of investments typically offer relatively low returns. In some cases they may not even keep up with the inflation rate, meaning your money is actually losing value.

If you want your investments to grow into wealth, you’ll need to take on some risk.

“The surest way to build true long-term wealth for retirement is to invest in the stock market,” Johnson said. “The biggest financial mistake people make is taking too little risk, not too much risk. [Investors] need to begin compounding early and let that compounding work its patient magic over decades.”

Keep It Simple

As Johnson reminds us, the surest path to becoming rich is to consistently invest in a diversified portfolio of sound investments over a long time horizon.

While there are no sure things in investing, if you don’t accept some risk you’ll never be able to take advantage of the power of compounding returns — and, if you try to take a shortcut by putting your money into shoddy or speculative investment vehicles, you run the risk of going bust. Don’t try to reinvent the wheel. The road to wealth is already laid out for you; all you have to do is start moving.

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This article originally appeared on GOBankingRates.com: I’m a Financial Planning Expert: Here Are 5 Investments To Avoid If You Want To Be Rich

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