The 5 Worst Things You Can Do With Your Money

I don't know about you, but I've done some pretty dumb things with my own money. In my younger days I gambled in Las Vegas casinos and lost money, and more recently I've made some pretty poor stock purchasing decisions by buying into clearly questionable companies and ignoring the tell-tale warning signs that were present.

But the great thing about each and every failure is that it's a learning lesson meant to keep us from making the same mistakes over and over again. Clearly, I'm going to make mistakes going forward, but the ultimate goal should be to profit from those mistakes so they become fewer and more far between.

Source: Stockmonkeys.com, Flickr.

The reason I even bring my own personal money mistakes up is that data released a few days ago by Thompson Reuters' Lipper research service shows that $43 billion was removed from U.S. mutual funds in the previous week. It's quite plausible that the majority of these withdrawals had to do with the possibility of a debt default, which was thankfully avoided, but it also represents the biggest investment outflow we've witnessed in more than two years. With the S&P 500 near an all-time record high, it's evident that investor uncertainty and skepticism could be boiling over.

This means there are countless investors out there right now searching for their next investment opportunity, and therefore plenty of opportunities for mistakes just waiting to happen. My goal today is to pass along some of the things I've learned from my investing past and help you avoid making some costly long-term mistakes. Here are what I believe are the five worst things you can do with your money right now.

1. Buy a CD
The allure of a certificate of deposit, better known as a CD, is simple: It offers a guaranteed rate of return in exchange for a commitment of investment with a bank, thrift, or credit union for a specified time (often ranging from as low as one month and as long as 10 years). The key words there for most folks is "guaranteed rate of return."

The problem with CDs right now is that their guaranteed rate of return is dictated by interest rates, and lending rates are still near historic lows. A quick pass at my own bank, Chase, earlier this week yielded some almost laughable return figures. Currently, a 12-month CD for any amount between $1,000 and $9,999 would earn you 0.05%. That's not a misprint. That's five hundredths of one percent! That means a $9,999 CD would net just $5 in a year. Although you're making money, the average increase in inflation over the past 100 years has been in excess of 3%. In other words, you'd be gaining $5, but losing badly to inflation in real dollars.

2. Buy penny stocks
It doesn't take much to be tempted by the allure of a penny stock. Every month it's not hard to find a highly touted over-the-counter Pink Sheets penny stock that's doubled or perhaps tripled in price despite a lack of news. Like winning the lottery, it inspires a feeling of invincibility among traders that you can't possibly go wrong. But make no mistake about it: They aren't smart investment vehicles.

Penny stocks on the over-the-counter board or the Pink Sheets are there for a reason -- they don't meet the stringent listing requirements set forth by the NYSE, Nasdaq, or S&P. You might overlook these listing requirements without so much as a pause, but these requirements are vital to your understanding of a business. The Pink Sheets have no requirement that companies file quarterly reports or business updates with the SEC. This means there's practically no way for you as an investor to get up-to-date information on the financial health of most penny stocks, or even learn the basics of what they do and how much cash they have in the bank. Furthermore, penny-stock companies are allowed to hire promoters to pump up the credibility of their company. Thanks, but no, thanks.

3. Buy a bond mutual fund or bond ETF
Similar to CDs, bonds offer investors a nearly guaranteed rate of return over a specified time limit. The difference between bonds and CDs is that most bonds aren't backed by the full faith of the U.S. government, which means there's always the possibility of a default and loss of your investment (although it's quite rare).

Bonds certainly offer investors better yield potential relative to CDs, but they also carry with them the potential for long-term underperformance in the current interest-rate environment. When interest rates remain low, bond mutual funds and bond ETFs such as the Vanguard Total Bond Fund (NYSEMKT: BND  ) remain attractive because their yields of 2%-3% compare very favorably to a 0.05% annual CD yield. But the one thing you must never forget about bonds is that bond prices and yields move in opposite directions. It's probably fair to assume that at some point in the next few years, interest rates are going to bounce off their historic lows, which means bond prices are going to fall. So while your bond mutual fund or Vanguard Total Bond Fund yield may rise, both are likely to lose value as bond prices fall, more than negating your gain in yield.

4. Buy a primary residence as an investment
I'm sure I'll get plenty of gripes with this one, since the housing market has been a gigantic source of income for some of the world's wealthiest investors. Yet over the long run, buying a house has been shown to statistically be a poor investment.

Let me clarify this by stating that I'm not talking about buying investment properties that you plan to rent out, or even purchasing your first home to live in. If you want to buy a house to live in, assuming you have the funds for it, buy that house! All I'm saying is that if you're buying your first home with the expectation that it's going to make you rich, you're probably going to be sorely disappointed.


Source: Robert Shiller, Irrational Exuberance.

According to Robert Shiller who looked back at inflation-adjusted home prices between 1890 and 1990 in his book Irrational Exuberance, he found that inflation-adjusted gains per year totaled just a measly 0.21%. It wasn't until the past decade that home prices really took off, but that seems to be more of an anomaly than a changing of the guard in the housing sector -- the point being that your home is a place to live in, and it shouldn't be counted on as an investment.

5. Nothing
There probably isn't anything more dangerous for your retirement than doing nothing at all. It's OK to sit on your cash from time to time and evaluate your investment opportunities, but squirreling money away under your mattress or a checking/savings account is no way to get ahead over the long term.

The reason here, again, is that while you're not losing money in nominal terms, your savings are being eaten alive by inflation. With inflation averaging 3.6% since 1913, you need to double your money every 20 years just to keep pace! If that money is tucked under your mattress where it's earning nothing, or sitting in a checking account that earns 0.01% annually, you're not doing yourself any favors.

Here's your game plan to beat the market
The truth of the matter is that millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal-finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.


Read/Post Comments (45) | Recommend This Article (53)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 26, 2013, at 12:34 PM, Billy123 wrote:

    What do I do when QE is never tapered (it can't be at this point, or it will crater the bubble economy), and world figures out we plan on borrowing & printing money forever? When they then decide to quit buying and selling oil in dollars, and the dollar's value collapses? I want to know what to do with my money then!

  • Report this Comment On October 26, 2013, at 12:35 PM, jlee45 wrote:

    You left out, buy a timeshare. Worst investment on the planet.

  • Report this Comment On October 26, 2013, at 12:48 PM, aalter wrote:

    A primary residence may be a bad investment in some parts of the country, but in many parts of the country, a primary residence has been a great investment.

  • Report this Comment On October 26, 2013, at 1:01 PM, uglyone wrote:

    Why isn't pay federal taxes in the number one spot?

  • Report this Comment On October 26, 2013, at 1:06 PM, EDCHASE wrote:

    there are on line CD's with better rates - not great -

    but better - including ones where you get a chance to bump up your rate if rates rise. Some of my money needs to be safe.

  • Report this Comment On October 26, 2013, at 1:28 PM, TMFUltraLong wrote:

    Jlee45,

    This list easily could have been expanded to a top 7 or even 10 -- and I agree, timeshares are indeed terrible investments.

    Sean

  • Report this Comment On October 26, 2013, at 1:41 PM, svjacobs wrote:

    A $9999.00 CD at 005% would earn would earn $49.99 per year (not $5.00). If you are giving out investment advice you had better brush up on your math.

  • Report this Comment On October 26, 2013, at 2:27 PM, lanceim59 wrote:

    I know the single worst thing anyone can do with their money is follow investment advice from Motley Fool. You are guarantee to lose at least 5%. Those idiots who keep cash under their mattress or in a saving/checking account do better than these FOOLS.

  • Report this Comment On October 26, 2013, at 2:28 PM, lanceim59 wrote:

    So pathetic. These MF writers can't even do simple math.

  • Report this Comment On October 26, 2013, at 2:32 PM, TMFUltraLong wrote:

    Svjacobs,

    If the yield were 0.5% you'd earn $49.99...

    The yield on one year CDs when I looked was 0.05% which is $4.995 annually, so my math is correct.

    Sean

  • Report this Comment On October 26, 2013, at 3:15 PM, PaulW wrote:

    [A $9999.00 CD at 005% would earn would earn $49.99 per year (not $5.00). If you are giving out investment advice you had better brush up on your math.]

    Either that, or you need another zero in your calculation.

  • Report this Comment On October 26, 2013, at 3:22 PM, toomuchgas wrote:

    I disagree that a bond fund is a bad investment. If interest rates hike up significantly everything will go down, but given that QE is still happening bonds can be an ok investment. You've got to put your money somewhere.

  • Report this Comment On October 26, 2013, at 3:26 PM, ralphrides wrote:

    a great alternative to the stock equities or bonds for your IRA savings is a variable annuity with met life or another insurance company. the new ones are not really annuities as they are able to be moved out to any other investment just like a brokerage account. What they give you is a guaranteed 5 to 6% annual return and can yield a much higher return but never less than the agreed minimum rate and each year your principal gets locked so it can never go down. the one I have is called a preference plus select b class. the only risk is these are not FDIC insured and are investments in those insurance compaines.

  • Report this Comment On October 26, 2013, at 3:39 PM, macjon55 wrote:

    Buy a timeshare.

  • Report this Comment On October 26, 2013, at 3:57 PM, JustOneBrain wrote:

    The # 1 VERY WORST investment you can make with your money : " Buy an engagement ring. " You will always lose your money some how.

  • Report this Comment On October 26, 2013, at 4:04 PM, SLTom992 wrote:

    One of the better ways to spend your money is on wine, women and song? Give me a Federal Bond anytime. My ex proved to me the error of these ways.

  • Report this Comment On October 26, 2013, at 4:19 PM, jdlech wrote:

    NO!!

    The absolute worst thing you can do with your money is to give it to anybody else. I mean giving gifts, buying other people things, marrying, having children, you should not do anything that involves giving anybody else your money.

    Invest it yourself, keep it to yourself, and don't ever give it to anybody else.

  • Report this Comment On October 26, 2013, at 4:41 PM, jamesjenson2013 wrote:

    My credit union offers CDs for 12 months at 0.30%. I use those for my savings for a rainy day. Credit Unions typically offer better rates.

    And I have a bond mutual fund that provides me great dividends and capital gains.

    The stock market if risky and you can loose most of your money.

    Plus with Obamacare kicking in, so many Americans will have less money to invest anyway. My health monthly insurance premiums were $233 in 2011 and are now $382 a month. The cheapest I could get in 2014 for my insurance company would be $448 a month.

  • Report this Comment On October 26, 2013, at 4:42 PM, jmbarns7 wrote:

    jdlech :

    Seriously? I hope this is a joke. If not, what a lonely life you must have! The "absolute worst thing" you can do for your soul is keeping all your money for yourself. You can be loving, giving, kind, and generous with your money and still be well off financially if you're smart about it. Again, I hope your comment was made with a heavy dose of sarcasm.

  • Report this Comment On October 26, 2013, at 4:54 PM, jrw1930 wrote:

    The stock market is up 20% plus so far this year. Why even look at CD's or bonds. That's the only way to keep ahead of inflation and the steady decline of the dollar.

  • Report this Comment On October 26, 2013, at 4:55 PM, jamesjenson2013 wrote:

    svjacobs - your math was incorrect.

    0.05% interest on $9,999 is $5.

    0.05% divided by 100 = 0.0005

    $9,999 times 0.0005 = $5

    At my credit union, a 12 month CD (0.30%) would provide $30 of interest. And that has FDIC insurance, where the stock market is not insured and you're taking a risk.

  • Report this Comment On October 26, 2013, at 5:29 PM, Johnnn wrote:

    A home is only an investment for your children to inherit. If the value of you home increases 20%...the next one you buy is 20% higher, or rent is 20% higher.

    The best thing you can do with your money is spend it today on future needs, tomorrow (literally) the same dollars will be worth less.

    I mean NEEDS...stockpile non perishable foods, cleaning supplies, most OTC meds., dried beans and other vegetable and fruits. replace the appliance that only has a yr or two left. The roof that has 5 more yrs left. Insulate your home, get high efficiency heating and cooling systems. Buy that new car today with cash, keep the old one and drive the new one a couple 1000 mi per year. Drive the old one til it dies....leave on the side of the road and drive the newer one. Invest in a freezer and a vacuum sealer and buy beef/chicken/fish, etc it will keep for over a year if vacuum sealed. Tomorrow (not literally) it will take all of your paycheck to buy milk, bread, eggs, and gas to do it all over again next week. If your really lucky and save for months you may be able to treat your family to a chicken wing.

  • Report this Comment On October 26, 2013, at 8:12 PM, ckblackm wrote:

    My credit union (NC SECU) is offering 12 month CD's at 1%, and it's a great place to stash an emergency fund (I use 4 CD's that come due staggered every 3 mos.)

    To me, it feels like we're in a QE bubble with stocks, and having been through both the dot com bubble, and the housing bubble in the last 13 years... I sure prefer some safety than continuing to "invest" on the "greater fool" theory.

  • Report this Comment On October 26, 2013, at 8:46 PM, AssetDesignCente wrote:

    So, the author is suggesting that anyone who follows the advice of a professional financial planner and holds a diversified portfolio that includes x% of bond funds, is making a mistake? The CFP board should be all over this on. Obviously, the author is not a financial professional.

    One might also point out that as interest rates rise and bond prices fall, reinvested dividends purchase more and more bond shares at lower prices.

  • Report this Comment On October 26, 2013, at 9:04 PM, wrldtrvlr wrote:

    # 4 is poor advice. You can make a pile of money on your primary residence. Not everyone lost money in the California real estate market....some make a small (or large) fortune.

    Intelligence applies to real estate just as it does to stock investing.

  • Report this Comment On October 27, 2013, at 5:19 AM, shineridge wrote:

    The BEST places to invest money are GOLD and other precious metals, non-perishable foods (for when the dollar and economy CRASH), a water filter, guns and plenty of ammo, and assets that can be sold or used for barter, again, for when the economy crashes. The WORST place to invest money is FRAUD STREET. The stock market is a MANIPULATED joke !!!!!!!!

  • Report this Comment On October 27, 2013, at 6:08 AM, prophotoman wrote:

    The best move you can make is to vote against all democrats and R.I.N..O.S! tHAT WILL HELP BOTH OUR ECONOMY and YOUR SAVINGS!

  • Report this Comment On October 27, 2013, at 8:40 AM, jvinijvini wrote:

    I'm very disappointed in the Fool. This article ignores asset allocation and advocates market timing. Investors should stick to their plan! If it's time to rebalance into a bond fund do so!

    Why?

    If there is some melt down or catastrophic event and stocks plunge, a portion of your money is protected.

    Even when rates rise (they will as tapering ends) bond ETF's continually buy more bonds when others mature. You may lose a little in the short term with BND, but that will be made up for and you will actually gain in the long run (read Vanguard's study about effects of interest rates, and look at what happened last time rates rose-hint, people made money)

    Timing the market is a losers game.

  • Report this Comment On October 27, 2013, at 11:33 AM, ralphrides wrote:

    Triboro Postal Credit Union 12 month CD is yielding 1.51 %

    1.51% is 0.0152 times the CD principal or 9999x0.015=$149.985

    using what I believe was meant to be 0.05% is 0.0005x9999=$4.995

    but realistically he probably meant 0.50% is 0.005x9999=$49.995

    FYI that Met life Preference Plus Select B Class variable annuity annual yield over the last 4 year 4 month time I opened it at 6% min guaranteed yield has actually yielded 7.34% on the initial investment principal of $10.67K its now worth $14.07k

  • Report this Comment On October 27, 2013, at 2:34 PM, herschel wrote:

    one does not multiply 5% times 9999.00 to get the rate or interest.

    example 5% x 9999 = 49.995 is wrong. You have to change the 5% into a decimal..5% is .05 then x 9999=499.95 ...

    To change a percent to a decimal remove the % sign and move the decimal point two places to the left.Multiply the decimal times the dollar amount

    and get the rate or interest. .

  • Report this Comment On October 28, 2013, at 7:10 PM, Paulml44 wrote:

    It really is sad when you have ignorant neophytes providing purportedly sophisticated investment advice. Your writer is simply prejudiced against real estate and bonds and has no understanding of their utility as part of a balanced investment portfolio. Sad.

  • Report this Comment On October 28, 2013, at 11:02 PM, ripsnort wrote:

    Also forgot; get in a hurry and "sell" stocks- and mistakenly hit the "buy" key! Really ugly results! But I doubt that I will ever do that again.

    I often wonder if I'm the only one that was that stupid?

  • Report this Comment On October 29, 2013, at 1:16 AM, digitalroom wrote:

    doesn't matter what u buy. if you don't understand what you're doing ur bound to lose much more than those who know. the trick is to know what to invest in especially in tricky times that we're in today. I absolutely agree that one of the best investments you can do today is buying gold and buy at least 25% or more of your total portfolio. this economy is going to crash and burn soon and everybody knows it and when it does, precious metals will shine brightly then.

  • Report this Comment On October 29, 2013, at 7:21 AM, dbtheonly wrote:

    shineridge,

    How's that gold done for you over the last year or so?

    Paying attention to those purveyors of doom (AND CAPITAL LETTERS) who consistently predict the breakdown of civilization and the destruction of "fiat currency" is a sure-fire way to lose money.

  • Report this Comment On October 29, 2013, at 11:28 AM, jlclayton wrote:

    I don't believe the author is prejudiced against real estate and bonds, and his advice makes good sense.

    We live in the Midwest, and our area did not have the kind of real estate bubble and crash as other areas of the country. If you buy your home in a good area at a decent price and keep it up well, you can reasonably expect to have a good asset at retirement. However, you have to sell it to get any gains, and many do not want to do that. Also, any number of things can negatively impact your ability to sell at a desired price at the time you want to. So relying on your primary residence to fund your retirement as an investment has many risks that are out of your control and is not a sure thing.

    As far as bonds, it depends upon your age and risk tolerance as far as their place in your portfolio. However, it's not market timing to determine what percentage they occupy as your assets based upon the present economic conditions. With 15 years to retirement and interest rates set to climb over those years, I believe that there will be better opportunities to put bonds in our portfolio in the future compared to the dividend stocks that I've been concentrating on accumulating the last few years. If the bonds in your portfolio let you sleep at night, they should be there regardless of others' advice. But believing that there are better opportunities to invest in them in the future can be good advice as well.

  • Report this Comment On October 29, 2013, at 11:49 AM, Squirespeaks wrote:

    My imagination can go more deeply into the financial hellscape. Tell me these things aren't worse:

    1. Open a restaurant with no experience

    2. Buy a timeshare

    3. Marry a Kardashian

    4. Rent furniture/appliances

    5. Restore classic cars

  • Report this Comment On October 29, 2013, at 1:50 PM, rma1344 wrote:

    Be careful buying a variable annuity with guaranteed annual return. I thought that's what I had done when in fact, the only thing that is guaranteed is the death benefit, not the portfolio return. This is not bad if you don't need to annuitize and plan instead to pass the death benefit onto your beneficiary. But the death benefit, unlike life insurance is taxable.

  • Report this Comment On October 29, 2013, at 4:18 PM, jasenj1 wrote:

    Re: Timeshare.

    We bought a timeshare and it's more than paid for itself. How? Buy on the secondary market, e.g. eBay.

    We paid $50+$500 transfer fee. Annual maintenance fee is $700. Dropping the unit in the resort's rental program gets us ~$1500/yr. So the unit more than pays for itself every year, and every few years we can use it and let the built up rental income pay the maintenance fee.

    Now, buying retail from the resort for $20,000+ is stupid, and you need to be careful what you buy. But it can be a good purchase.

    Finally, yeah, the author doesn't know what he's talking about.

  • Report this Comment On October 29, 2013, at 11:18 PM, wildeweasel wrote:

    Real estate is a damned good investment if you are smart about it. If you rent at $1000/mth with a 3% yearly increase in 20 years you will still be paying rent at $1800. Buying a house at $1200/mth will be payed for and still worth something provided you did the maintenance. You will likely continue to live in the house for another 20-30 years or so after. Your rental payments will have increased $3200/mth.

    As with any investment there are so many ways to do it wrong as well.

  • Report this Comment On October 30, 2013, at 10:40 AM, alawrence37 wrote:

    I read somewhere that people were giving different money advice for women than they were for men (http://www.ljinvestmentresearch.com/). Shouldn't all the advice be the same, no matter what your gender? What sex is this advice geared towards? Please be gender neutral, fool.com!

  • Report this Comment On October 30, 2013, at 11:25 AM, MfromG wrote:

    The best posts are always "Motley Fool" knows nothing...yet I'm still on their website reading their articles.

  • Report this Comment On October 30, 2013, at 11:27 AM, MfromG wrote:

    Buy a boat or airplane...

    If it flies, floats or fornicates, RENT IT!

  • Report this Comment On November 01, 2013, at 4:14 PM, geezer27606 wrote:

    Home ownership can be a very good investment. If one buys a $100000 home with 10% down and pays the mortgage and other costs with money that otherwise would have paid rent then a 30% return on invested capital results. After a year of 3% inflation the house should be worth $103000 and the owner's equity has increases from $10000 to $13000 for a 30 % gain. To continue the process the owner needs to keep his equity fraction small with refinancings or a home equity loan. Safe leverage is the key to this investment. The clever investor would of course reinvest the capital thus generated by home ownership in some other productive enterprise.

  • Report this Comment On November 03, 2013, at 10:30 PM, gene619 wrote:

    WOW !,bickering about whether a CD is worth $4.99 or $49.99 ...why would anyone purchase one ?, you might as well put your money under the proverbial mattress or in a savings/checking acct.

    A wise investment is your best choice.

    Lets say you buy a stock like BCE which currently is at $43 and is paying 5.24% dividend,in the first quarter alone you would earn a $50 + dividend.

    I understand if you are skeptical about investing but there are stocks and funds that are reliable and with diligent work and good help you can prosper...

  • Report this Comment On February 11, 2014, at 11:23 PM, kalevine wrote:

    I have a new number one - buy BWP on Mr Williams' advice 3 days before it loses half its value

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