Investing is typically a pillar of long-term wealth creation. It doesn’t have to be difficult to earn a solid return over time, but people often over-complicate investing or make mistakes that shortchange their gains.
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Once you know what to watch out for, though, you can increase your chances of earning higher long-term returns. As Humphrey Yang, a former financial advisor and current entrepreneur, explained in a recent YouTube video, you should avoid these 10 common investing mistakes:
1. Buying individual stocks
Many people think of investing as finding the next hot stock, but it can be a mistake to try to pick a handful of individual companies to invest in. That’s not to say you should never invest in individual stocks, but you can often improve returns by investing in a mix of low-cost, diversified ETFs or index funds, suggested Yang.
Part of the problem is that picking stocks that outperform market averages is incredibly hard. Yang pointed to a study showing how even professional investment managers rarely beat the market.
2. Ignoring expense ratios
The expense ratio might seem like financial jargon, but it’s a cost you don’t want to overlook. This ratio is the fee you pay a fund manager and varies significantly across investment options.
Yang highlighted an SEC analysis showing that over 20 years, a $100,000 investment in a fund with a 1% expense ratio would net almost $30,000 less than a fund with a 0.25% expense ratio, based on a 4% annual return before fees.
3. Trying to time the market
It’s common to try to find the perfect time to invest, but you might be sitting on the sidelines while missing out on important returns. It’s more important to try to optimize time in the market — i.e., invest for longer — instead of timing the market, said Yang.
Consider a Wells Fargo analysis that showed how missing the top 30 days of S&P 500 index returns over the last 30 years would bring the index’s average annual return down from 8% to 1.8%, the latter of which didn’t even surpass the inflation rate.
4. Hiring a professional financial advisor for investing
This might sound contradictory coming from Yang, a former financial advisor, but in his view, investing was the easiest part of his job. Many financial advisors simply put you in ETFs and index funds that you can access on your own for a lower cost.
Instead, said Yang, a financial advisor is a better fit for things like financial planning, estate planning, and tax planning. If you do want to use a financial advisor for investing, consider using one with a more affordable model, like charging a flat-fee rather than a percentage of assets, said Yang.