Investing is usually the mainstay of long-term wealth creation. It's not difficult to earn solid returns over time, but it's easy to overcomplicate your investments or make mistakes that can destroy your profits.
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However, if you know what to look out for, you can increase your chances of getting higher returns in the long run. As former financial advisor and current entrepreneur Humphrey Yang explains in his recent YouTube video, these 10 common investing mistakes should be avoided.
1. Purchase of individual stocks
Many people think of investing as finding the next hot stock, but trying to pick a few individual companies to invest in can be a mistake. This is not to say that you should never invest in individual stocks, but in many cases you can improve your returns by investing in the following ways: Yang suggested investing in a combination of low-cost, diversified ETFs and index funds.
Part of the problem is that it's very difficult to pick stocks that outperform the market average. Yang pointed to research showing that even professional investment managers rarely beat the market.
2. Ignore expense ratios
The expense ratio may seem like a financial term, but it's a cost you don't want to overlook. This ratio is a fee paid to the fund manager and varies widely depending on the investment option.
Yang highlighted an SEC analysis showing that a $100,000 investment in a fund with a 1% expense ratio would generate nearly $30,000 less in net income over 20 years than a fund with a 0.25% expense ratio (before fees). (based on an annual return of 4%).
3. Trying to time the market
It's common to try to find the best time to invest, but you could be sitting on the sidelines missing out on important gains. Yang said it's less about timing the market and more about optimizing your time in the market, or trying to invest for the long term.
Consider Wells Fargo's analysis showing that missing the top 30 days of the S&P 500 index's returns over the past 30 years reduces the index's average annual return from 8% to 1.8%. The latter did not even exceed the inflation rate. .
4. Hire a professional financial advisor for your investments
It may seem contradictory for Mr. Yang, a former financial advisor, to say this, but in his opinion, investing was the easiest part of his job. Many financial advisors simply refer you to ETFs and index funds that you can access on your own at a low cost.
Instead, financial advisors are better suited for things like financial planning, estate planning and tax planning, Yang said. If you want to use a financial advisor for your investments, consider using one with a more affordable model, such as one that charges a flat fee rather than a percentage of your assets, Yang said.
5. Investing based on emotions
Yang said many people make the mistake of investing based on emotion. Giving in to emotions such as fear and greed will often lead you to sell low and buy high, which is the opposite of the goal of maximizing your investment return.
6. Try to optimize revenue
It's very difficult to beat the market over the long term, so you can often get ahead of the average investor by simply investing for the long term, rather than aiming for the highest possible return.
Yang pointed to a clip from Stephen Bartlett's podcast. CEO diary. In this clip, Morgan Housel, author, psychology of money, explains the value of patience in investing. According to him, simply earning an average return over an above-average period can actually put you in the top 5% of investors.
7. Don't reinvest dividends
Dividends are a good way to earn passive income for some investors, but what you do with them is important. If you withdraw your dividends as cash, your long-term benefits may be limited compared to reinvesting your dividends.
As Yang pointed out, automatic dividend reinvestment is often enabled with the click of a button within your brokerage account.
8. Lack of appropriate asset allocation according to age
The mix of assets you invest in, such as stocks and bonds, often depends on your age.
Generally, 18-year-olds won't want to invest 100% in bonds, because for most people it's too risk-averse, given the time they have to ride out market fluctuations, Yang said. I did. In contrast, a 65-year-old probably doesn't want to own a small number of individual stocks. This is because risk is too concentrated in a small number of volatile assets.
9. Trading options
Options trading is sometimes done as a ticket to riches, but these can be highly speculative investments. Some people get lucky and hit some winners, as Yang himself said he had success trading GameStop options in 2021. However, just a few years later, Mr. Yang ended up losing all of those profits, resulting in negative returns on his options trades overall.
In other words, even for a professional like Yang, it's very difficult to put the options in front of you.
10. Don't invest in index funds
As mentioned earlier, index funds can solve many of the common investing mistakes. There are many different types of index funds, but you can often find well-diversified index funds with very low expense ratios, such as those that track the S&P 500.
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As Yang pointed out, these are generally easy to purchase, and if you can't find a specific index fund at your brokerage, there are usually equivalent ETFs you can invest in.
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This article originally appeared on GOBankingRates.com: TikTok's Humphrey Yang says these 10 investment choices are sacrificing returns
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