The Fastest Way to the Poorhouse

Ultimately, there are two conscious approaches that people take to investing. Let's call them: 1) the "GET RICH QUICK" approach, and 2) the "GET RICH SLOW" approach.

And while people don't realize it, there are two other approaches as well – 3) the "GET POOR SLOW" approach, and the dreaded 4) "GET POOR QUICK" approach.

Unfortunately, a great percentage of investors, probably most of them, actually end up using approach No. 4...

Here are some of the things that have consistently proven themselves to be part of the "GET POOR QUICK" approach.

• Buying and selling options as a "novice." Getting lucky and hitting a big winner in options is the worst thing for a new options trader. That almost ensures that he'll eventually lose everything by going back for more, always looking for that big score, until all his money is gone. Options can be traded successfully – with the right tools, the right knowledge, and the right advice.

• Buying and selling futures. Same story as options.

• Buying an expensive computer trading program and trading with it blindly. (If someone truly figured out the Holy Grail, why would he sell it to anyone who wanted it for just $2,000?)

• Putting all your eggs in one risky basket. Like options, if you were to happen to get lucky once and make a zillion dollars, you'd lose it the second time around (or the third). Eventually, it will all be gone.

• Throwing good money after bad – buying more as the price falls. This is nearly always what investors do after the stock they've put all their eggs in starts to go down. Instead of getting out – or lowering their risk – they mortgage the house, the car, the family cat, whatever, just so they're not proven wrong. And if they ultimately are right (which is very rare), they'll do it again the next time around. Then, they'll definitely lose it all.

• Speaking of mortgaging... leveraging up, using margin, or any type of borrowing money for stock trading is generally a bad idea. It's not that the debt is bad in itself. But it's generally a sign of people who are gambling. And if they lose it all, they're still responsible for paying back the money they borrowed.

Then, there are a lot of just generally bad investments...

• In general, private placements are incredibly risky. If you're throwing $50,000 into a telecom startup, you should be prepared to mentally write off that money. If it happens to turn into millions, be thankful. But don't buy that yacht just yet...

• Secretive investments. There have been tons of frauds here – offshore prime bank debentures, promissory notes, offshore investment club programs – all promising things like 10% a month or more. Folks, it's just not possible. All their secretive stuff, saying that "this is what the big banks really do with their money" is BS. $10,000 compounded at 10% a month for 10 years would turn into $1 billion. Even Warren Buffett can't touch that.

• Wiring money offshore. Generally, these secretive investments require you to wire money to strange lands. I saw one once promising 8% a month that was a Panama corporation with a post office box in Costa Rica, asking you to wire your money to Latvia. Who do you go after when your money disappears? By the way, I've done business offshore, managing an offshore hedge fund based in the Bahamas. If you know the people you are doing business with are reputable and have been doing business for a long time, you're probably fine. But wiring your money to Latvia on behalf of a Panamanian corporation using a P.O. box in Costa Rica?

I could go on (and on and on). The list of bad investments and investment mistakes is far longer than the list of smart investments. But these things described above are the major ones to avoid the "GET POOR QUICK" track.

Here's a checklist for you to follow to avoid making major mistakes in your investments from now on:

Answer "yes" to all these questions, and your investments won't lead you to the poorhouse.