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Investing is an excellent way to build long-term wealth. But how do you decide the best way to invest?
You might ask your friends or family for advice.
Perhaps you see how billionaire investors, like Warren Buffet, choose their investments. Or, maybe you hire a financial professional for guidance.
The problem is there is so much advice out there; it’s hard to sort the good from the bad.
Most people giving investing advice mean well. But that doesn’t mean their recommendations are right for you.
Unfortunately, the consequences of poor investment advice can last for years. Read on to learn about bad investing advice you should ignore – and why.
Bad investing advice to ignore
Below is some of the worst investing advice out there – advice that should raise red flags. But this isn’t an exhaustive list.
No matter the recommendation or where it comes from, it’s wise to do your homework. Then you can determine the right investment approach for you.
You should talk to our financial advisor.” – your best friend.
You trust your best friend. But that doesn’t mean their advisor has the best financial advice. They might pay high management fees or get low returns without even realizing it.
Plus, what works for them might not work for you.
We all have different incomes, money goals, and risk tolerance.
Before you hire a pro recommended by someone you know, do your due diligence.
Check references and understand how the advisor makes money. Is the advisor fee-only or commission-based?
Fee-only advisors get paid by you. You pay a set fee for advice and management. Fee-only advisors are fiduciaries, legally obligated to put clients’ interests first.
Commission-based advisors make money by selling investment products to clients. Not all commission-based advisors get held to fiduciary standards, which can pose a conflict of interest.
Ask how they get compensated and if they are fiduciaries.
When you work with an advisor, make sure you understand the recommended investments.
Ask questions to find out how they work, along with their fees and performance. Make sure the investments fit your financial plan before handing over your money.
“You should invest in (this hot stock). Jane is making a killing on it.”
Maybe the investment was right for Jane. Perhaps it could be for you. But maybe it’s not all it’s cracked up to be – or its time has passed.
Investing in stocks for a quick win is like gambling. Making bets on the latest hot stock might work out sometimes – but even a broken clock is right twice a day. Unfortunately, you rarely hear about the inevitable losses.
Before investing in any stock, make sure it’s an investment you want to hold long-term. Determine how any investment fits your overall money goals – and if it’s worth the risk.
“You just need to time it right. Buy low and sell high to make money on stocks.”
Timing the stock market is an attempt to buy a stock at a low price and then sell it when it’s high – for a profit. For this to work, you have to know precisely when to buy and sell a stock.
Unless you have a crystal ball, it’s unlikely the timing will work out.
Some investors might try to time the market when stock prices are going down. They’re afraid of losing money, so they make rash decisions to sell when prices are dropping.
The intention is to buy again when prices go up, but getting the timing right can be a losing game. In this situation, it’s common for investors to miss out on gains in a rebounding market.
Time in the market is better than timing the market. Studies show that timing the market is a poor investment strategy.
Not only does frequent trading come with higher fees, but you never know how the timing will work out. It’s often a losing proposition—when compared to long-term, low-cost index investing.
“You should stick to cash. Investing is too risky.”
There’s always some risk with investing. Anytime you invest, you can expect times when your investments go down. But not investing at all poses a significant threat to your long-term wealth.
Don’t get us wrong – saving cash is a necessity. It's best to have savings for unexpected expenses and short-term goals. But the interest rates on most savings accounts are (way) too low to keep up with inflation.
Saving and investing are two different things, meant for two different money goals. After you have emergency savings, it's wise to start investing in building a nest egg for the future.
Your ability to handle risk will vary, depending on your age and money goals. There are ways to invest that keep risk low but also build wealth.
Diversified, low-cost investments help hedge risk and grow your money for long-term purposes.
“Your home is a good investment.”
Most homes appreciate over time, which leads some to think of buying a house as an investment. But just because a home's value goes up doesn't mean it's a good investment.
Thinking of your home as an investment is a problem for several reasons:
- Historically, real estate appreciates at a rate just slightly ahead of inflation.
- Value increases get offset by costs, including maintenance, property taxes, and insurance.
- Transaction costs are high. Unless you plan to live in a house for several years, buying/selling costs cut into appreciation.
- The interest tax deduction is too small to be much of a benefit.
- A home’s value isn't liquid. A paid-off house is excellent for retirement. But the appreciation gets tied up in the equity and is difficult to access.
We aren't saying you shouldn't buy a home! Just think twice about using it as part of your investment strategy.
If you choose to buy a home, do it because it's a good fit for you, not as an investment. If you get lucky and make a nice profit on the sale later, it's a bonus!
“Investing is complicated. You have to hire a professional to manage your investments. ”
You don’t have to be an expert and know it all to start investing. And you don’t need to hire a pro if you don’t want to. Some investing advice can make it seem complicated, but it doesn’t have to be.
Many successful DIY investors keep it simple by using a set-it-and-forget-it approach.
One of the easiest ways to do this is through a low-cost index or target-date retirement funds. These investments make it easy to diversify without much time or effort.
Not ready to DIY it? Robo-advisors fall somewhere between DIY and hiring a pro. You choose your risk tolerance, and the robo-advisor selects a pool of investments to match it.
If you’re uncomfortable handling your investments, or want extra help, hire a professional. Take your time to find an expert that answers all your questions and is a good fit for you.
Don’t let bad investing advice keep you from investing.
Even suitable investments don’t make money all the time. There are ups and downs, no matter how you invest. But investing is an essential tool for reaching long-term money goals, like retirement.
Ignore the bad investing advice out there and remember:
- Long-term investing is best. People who invest according to their risk tolerance and stick with it long term (through market volatility) come out ahead.
- You don’t have to be an expert to start investing. Once you know the basics, you can get started. Whether you do your own investing, use a robo-advisor, or hire a financial planner, basic knowledge goes a long way.
- Getting started is one of the most important things you can do. The amount of time you invest is often more critical than the specific investments you hold. Start small and keep it simple in the beginning, but do get started.
- Don’t try to time the market. Investors who buy and hold investments do better than investors who try to time the market.
- Create an investing plan. Write down your money goals and work backward from there to reach them. An Investment Policy Statement is an excellent way to organize your investing goals. Also, it keeps you on track as the stock market fluctuates and life changes.
“If you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes.”– good investing advice from Warren Buffet.
The best way to protect yourself from bad investing advice is to verify it for yourself! If it sounds too good to be true, it probably is.
Investing doesn’t have to be complicated, and there isn’t a right and wrong way to do it.
It’s wise to do your homework and decide on an investing strategy that feels right for you and your money goals.