When the Stock Market Recovers, This Is the One Type of Investor You Don't Want to Be

The S&P 500 index's returns, which track the performance of 500 of the largest companies listed on U.S. stock exchanges, are up an impressive 14% over the past year but have been flat over the past month. Temporary market pullbacks like this may cause some investors to look for new ways to quickly earn money.

And that temptation to find unconventional approaches to investing can be very risky when investors stumble across opportunities that may seem great at first but end up being huge mistakes. Here's why investors should avoid all-or-nothing investments.

What is all-or-nothing investing?

All-or-nothing investments are also referred to as binary options and involve buying securities with an entirely yes or no proposition, according to the U.S. Securities and Exchange Commission (SEC). In other words, you either potentially make far more than your initial investment or make nothing at all.

The SEC says on its website that an all-or-nothing investment may involve buying a $50 binary option contract that promises a 50% return if a particular stock price exceeds $5 per share. If the stock price doesn't go above $5 by the time the option expires, you lose all the money you've invested.

This is in contrast to most traditional stock-purchasing strategies, where you select a stock in your brokerage account and wait for the stock price to increase over time. If the stock price falls below the amount you bought it for, you only lose money when you sell -- and you only lose all of your money if the stock goes to $0.

It's also worth mentioning that all-or-nothing investing differs from placing an all-or-none order through your online broker. An all-or-none order is when you place an order to buy a specific number of shares at a set price, and they have to be all purchased at the same time or not at all, according to Charles Schwab.

Why all-or-nothing investing is a bad idea

The first reason why buying binary options is a bad idea is because you can easily lose all of your money. In this sense, all-or-nothing investing is like gambling. You place a bet, and if you lose, you're out all the money you put in.

Additionally, the SEC warns investors that some binary options may not comply with federal securities laws, meaning that someone could be selling you unregistered securities or selling stocks through an unregistered exchange.

Even worse, the SEC says that the biggest risk of all-or-nothing investments is that many binary options operators are trying to scam you. A few warning signs include offering investments that are said to be risk-free, someone asking for your personal information, or the seller pretending to be your friend to convince you to invest more money.

Because many of these binary options operators are set up outside of the U.S., getting your money back is nearly impossible if you're scammed.

A better way to invest

Like any get-rich-quick scheme, all-or-nothing investing doesn't work, and many are just scams.

If you're interested in investing, there are straightforward ways to make money. Legendary investor Warren Buffett recommends that the average investor put their money into an S&P 500 index fund. The S&P 500 has a historical rate of return of about 10% over the long term -- think decades, not just a few years -- and investors don't have to know anything about buying and selling stocks to benefit from it.

Owning a low-cost index fund is an easy way to invest, as these funds don't charge high fees, you don't have to pick any stocks yourself, and they can even be purchased through some free stock trading apps. If you're just getting started with investing and need some guidance, check out some free information about the best online brokers for beginners.

Just remember that, like most things in life, if an investment seems too good to be true, it probably is.