10 Ultra-Popular Investing Strategies You Should Probably Avoid

Investing can create wealth or consume wealth, depending on how you go about it. Obviously, your goal is the former -- to strengthen your finances and not weaken them.

You can give yourself the best shot at investing success by sticking with tried-and-true tactics. Invest in quality companies you can hold for decades, stay diversified, and keep a cash emergency fund. Also, steer clear of complex investing strategies, no matter how trendy or popular they appear to be. For most investors, aggressive investing tactics come with more risk than they're worth.

Here are 10 of those popular investing strategies to avoid.

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On any given day, the price of one share of Carnival stock could fluctuate by $1 or $2, for example. Mathematically, that presents an opportunity. If you could buy 500 shares at the low point and then sell them at the high point, you'd make $500 or so in a few hours. That's what day traders attempt to do, but on a grander scale. They look to profit on small share price movements that occur throughout the day.

The trouble is, day trading can go wrong more easily than it can go right. To turn a profit day trading, you must execute your trades perfectly. There's a lot working against you in that regard. First, timing the market is an inexact science, even for experts. And secondly, you are competing against institutional investors that use algorithm-based trading systems to act on opportunities very quickly.

With those obstacles, day trading is often a losing proposition.

ALSO READ: Thinking About Day Trading? Do This Instead

Swing trading also capitalizes on small share price fluctuations, but the time frame is slightly longer. Swing traders attempt to get in and out of a stock over a few days or weeks.

As with day trading, swing trading profitably relies on timing the market. If the stock doesn't move the way you expect, you must choose between selling at a loss or leaving your cash tied up in the position.

There's also an opportunity cost to short-term trading. When you're moving in and out of stocks quickly, you miss the chance to benefit from long-term market trends, which can be more reliable.

Penny stocks trade for less than $5 per share. Their low price point can be appealing because you can buy many shares. The idea is to invest a tidy sum and then turn a good profit on a slight increase in share value.

Unfortunately, penny stocks are far riskier than their higher-priced counterparts. For one, there's usually less information about the company available. Some penny stocks don't file financial statements with the Securities and Exchange Commission. And often, there's no coverage of the company's activities by financial market analysts. Penny stocks also lack a steady stream of investor demand. As a result, they can be hard to sell, and the share prices can be wildly volatile.

The biggest reason to avoid penny stocks, though, is the high failure rate. Most of these stocks will lose value and many will become worthless.

Buying on margin is the practice of investing with borrowed money. Brokers will lend you up to 50% of the trade price, and you pay interest on the balance. Your stock portfolio is the collateral. If your portfolio's value falls below a threshold, known as the maintenance margin, your broker can sell your stocks to get your account back in compliance.

Trading on borrowed funds magnifies your gains and your losses. As a simple example, you might borrow $5,000 to buy $10,000 of a stock. If your stock appreciates by 10%, you will make $1,000 on a cash outlay of $5,000. That's a 20% return. If your stock drops 10%, you will have lost 20% of your $5,000. Had you funded the same transaction with all cash and no borrowing, your gain or loss would be 10%.

The amplification of losses and the addition of a debt obligation makes buying on margin too risky for most investors. It's not worth the upside.

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Funds can also use debt to amplify their returns. Leveraged exchange-traded funds (ETFs) use debt and other financial instruments to target returns that are two or three times the performance of an underlying index such as the S&P 500.

Looking at the S&P 500's strong performance since 2019, you might love the idea of earning two or three times as much. But that's not the promise of a leveraged ETF. These funds don't shoot for annual results. They target the doubling or tripling of the index in a single day. And, of course, the change can be positive or negative. If the index drops 25% in one day, a two-times leveraged ETF probably falls 50%. That's a tough pill to swallow.

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We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Inverse ETFs look to deliver gains when an underlying index drops in value. If the S&P 500 falls 25% in a single day, an inverse S&P 500 fund should gain 25%. As with leveraged ETFs, these funds are designed to move against daily changes in the underlying index, not annual changes.

The inverse ETF is an alternative to short-selling, which involves borrowing a stock, selling it, then buying it back later at a lower price -- basically, selling high and buying low.

You'd only buy an inverse ETF or take a short position when you expect the market or a particular stock to lose value. You can turn a profit this way if the market moves as you predict. But if share prices rise, you'll be sitting on a loss.

Options are contracts that give you the right to buy or sell a security at a specific price. You can be an option buyer or an option seller. The risks to option buyers are low -- limited to what you spend buying the option contract. But option sellers can have unlimited risk.

Experienced investors use options to offset risk, but this isn't a necessary strategy for most investors. There are simpler ways to manage risk, such as asset allocation and investing for the long term.

Some investors also get lured into using options to speculate on price changes. Speculation in general is risky. Even if you limit yourself to buying options versus selling them, you still stand to lose money. Instead of buying options contracts that may produce nothing, you probably benefit more by using those funds to invest in quality stocks.

ALSO READ: I'd Be Much Richer Now if It Weren't for This One Investing Mistake

IPO (initial public offering) investing involves buying a stock when it debuts on a public stock exchange. Institutional investors usually get to reserve shares first, at a predetermined per-share price. If you don't get early access, you must buy shares on the exchange once they're available.

In their early trading days, IPO stocks can be volatile. Investors are often caught up in the excitement of getting in on "the next big thing." That can generate a flurry of trading activity that drives the share price higher. Unfortunately, paying a premium for a company that's only starting its journey of public ownership often isn't a good idea.

The safer alternative is to wait for the IPO excitement to die down before buying. If the company is solid and has long-term potential on the day it goes public, it will still be a good investment later.

High-yield bonds, also known as junk bonds, are loans to corporations or entities that have lower credit qualifications. Specifically, these borrowers have credit ratings that are below investment grade. This means there is a higher chance the borrower will not be able to make its loan payments.

As you'd expect, business borrowers with poor credit pay higher interest rates because of the increased default risk. This translates to higher yields for those who invest in bonds that are below investment grade.

The difference in yield between junk bonds and U.S. Treasuries fluctuates, but it's currently about 3.4%. That's not a huge reward given the additional risk. Depending on your investing goals and timeline, a mix of U.S. Treasuries and dividend-paying blue chip stocks may suit you better than junk bonds.

We've all run across investment opportunities that promise big returns. Maybe a neighbor has tried to loop you into a no-fail multilevel marketing business or a cousin wants you to invest in his app that's sure to be a hit.

Unfortunately, a sure thing doesn't exist in investing. Without exception, if there is the potential for healthy returns, there is also risk. If an opportunity appears to be risk-free, that means you are missing critical information.

Risk isn't inherently bad. Even the safest stocks have some degree of risk. What gets you into trouble is not recognizing or managing the risk you have in your own portfolio. That's why "no-fail" investments can be so damaging -- you won't be prepared if the investment goes sideways.

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Let other investors dabble in advanced investing strategies. Short-term trading, penny stocks, leverage, short-selling, and the like invite volatility into your finances, and you don't need that. What you do need is a portfolio that balances risk and reward appropriately. Boring and conventional investing tactics can deliver that balance -- and the long-term wealth creation that comes with it.

Catherine Brock has no position in any of the stocks mentioned. The Motley Fool recommends Carnival. The Motley Fool has a disclosure policy.