According to data from the Federal Trade Commission (FTC), Americans lost a staggering $10 billion to fraud in 2023, with over $4.6 billion of that lost to investment scams. As you consider where to put your money, you’ll undoubtedly aim for the best returns with minimal risk. However, several popular investments might not deliver the returns you expect. Let’s dive into five common investments that probably won’t make you a lot of money.
1. Certificate of Deposit (CD)
Certificates of Deposit (CDs) are often seen as a safe haven for investors wary of stock market volatility. As Robert R. Johnson, PhD, CFA, CAIA, and Professor of Finance at Creighton University’s Heider College of Business explains, “CDs are debt instruments issued by financial institutions in exchange for a deposit made by an investor.” The interest rates on CDs are tied to the rate on United States Treasury investments of comparable maturity.
While CDs offer consistent, virtually risk-free returns, they aren’t likely to significantly grow your wealth.
Why this may not be a good investment…
“The rate of return on CDs is lower than rates typically available on higher-risk alternatives,” Johnson notes. CDs generally pay a rate of interest below that paid on long-term government bonds. With the S&P 500 providing an average annual return of 24% in 2023, compared to CD rates around 5%, it’s clear you could earn more by taking on some risk. Johnson aptly puts it, “CDs are more wealth protection instruments than wealth-building instruments.”
2. Money Market Funds
Money market funds are mutual funds that invest in short-term debt instruments, offering high liquidity and low risk. Johnson explains, “The term ‘money market’ applies to high-quality, short-term debt instruments that mature within one year.”
While money market funds are safe, they aren’t designed to generate substantial returns.
Why this may not be a good investment…
Money market funds are for those seeking high liquidity and minimal risk. However, the returns are not high enough to significantly grow your wealth. These funds are more suitable for short-term cash parking rather than long-term investment growth.
3. Purchasing a Home for Airbnb
With the rise of Airbnb, many investors saw an opportunity to profit by purchasing homes for short-term rentals. While this strategy can yield income, it involves substantial upfront costs and ongoing expenses such as mortgage payments, property taxes, and insurance.
Why this may not be a good investment…
The short-term rental market is fraught with uncertainties. Local regulations can change, as seen with New York City’s recent crackdown, which led to around 20,000 short-term rentals being removed from Airbnb. You could also face local legislation banning short-term rentals, leaving you with a property that might not generate the expected income.
4. Cryptocurrency Assets
Cryptocurrencies gained immense popularity during the pandemic, with tales of ordinary people making extraordinary profits. However, the collapse of platforms like FTX highlighted the risks and volatility inherent in this unregulated market.
Why this may not be a good investment…
Cryptocurrency investments require a high risk tolerance due to their extreme volatility. The FBI’s Internet Crime Report for 2023 revealed that Americans lost $3.9 billion to crypto-related scams, a 53% increase from the previous year. Despite the allure of high returns, the lack of regulation and potential for scams make crypto a risky investment that may not pay off.
5. US Government Securities (Treasury Bills, Notes, and Bonds)
US Government securities, such as Treasury Bills, are seen as some of the safest investments due to their low risk of default. They provide stable returns but often fall short of delivering significant growth.
Why this may not be a good investment…
The main drawback of US Government securities is their relatively low rate of return compared to other fixed-income securities. While they provide peace of mind, they might not keep pace with inflation or help grow your wealth substantially. Johnson summarizes it well: “You’ll sleep well if you commit funds to low-risk investments like money market funds or Treasury Bills, but your investments will not grow substantially and may even have trouble keeping pace with inflation.”
Conclusion
In the quest for safe and lucrative investments, it’s crucial to balance risk and return. While CDs, money market funds, short-term rentals, cryptocurrencies, and US Government securities each have their merits, they also come with limitations that could hinder substantial wealth growth. To make the most of your investments, consider diversifying and consulting with a financial advisor to explore options that align with your financial goals and risk tolerance.