Investing the cash you don’t need right now is the best way to grow your money and build long-term wealth. But there are no guarantees, and every dollar you put in play is one you risk losing.
While risk is part of the game, wasting money doesn’t have to be. Here’s a look at the things you shouldn’t do if you want to keep more of your money working hard for you.
The most obvious way to waste money is by paying fees you could have avoided — and there’s no shortage of people looking to nibble away at the wealth you’re trying to build.
“One common mistake is investing with advisors who charge high fees but don’t provide commensurate value,” said R.J. Weiss, certified financial planner and founder of The Ways To Wealth. “Understanding what you’re paying for is important and ensuring that the services provided justify the cost. A 1% fee added up over one’s lifetime can easily add up to six figures.”
It’s not just advisors. Brokerages can charge commissions, robo-advisors take a percentage and funds charge fees even when they’re not actively managed.
“Certain mutual funds and exchange-traded funds (ETFs) have high expense ratios, which eat into your returns over time,” said Vineta Bajaj, group chief financial officer and senior finance executive who serves as an angel investor and advisor to several pre-seed start-up companies. “It’s important to be mindful of the ongoing costs associated with an investment. Often, the brochures state X return, but the fees are in the fine print.”
The IRS taxes long-term capital gains from the sale of securities you’ve held for more than a year at a lower rate than short-term gains from securities you buy and sell within a year.
“Day trading or frequent buying and selling of securities can lead to significant costs due to transaction fees and can also have tax implications,” Bajaj said.
But more importantly, frequent buying and selling for short-term gains ends up being a losing proposition for most investors over time, which is why nearly all advisors recommend buying securities you like and holding them for the long term.
“Timing the market consistently is very difficult, even for professionals,” Bajaj said. “Many investors think they can outsmart the market by buying and selling at the right time. However, timing the market is incredibly challenging, and many who try it end up buying high and selling low.”
Hot stock tips are great if you use them as a starting point to research a company you’re hearing good things about — but a recommendation alone is never enough, no matter where it comes from.
“Some investors dive headfirst into the investment pool without doing their due diligence,” Bajaj said. “Investing without understanding the fundamentals of a company, its business model, financial health and the overall industry landscape can lead to bad decisions and financial losses.”
The phrase “past performance is no guarantee of future results” appears on nearly every prospectus. It’s the investing equivalent of a warning label — and one that you should always heed to avoid the trap of bandwagon buying.
“Investors often pour money into funds or assets that have recently done well, assuming that the past performance will continue into the future,” Bajaj said. “However, this isn’t always the case, and such an approach can often lead to buying high and selling low.”
Liking a company does not mean you should buy its shares. Whether you had a good experience with an airline or heard about an underdog stock you’re rooting for, your research should drive your decisions, not your feelings.
“Avoid emotional decision-making such as investing in meme stocks like Gamestop or crypto,” Bajaj said. “The FOMO that people feel can bring long-term damage and people can lose a lot of wealth.”
One of the golden rules of investing is to spread your eggs into different baskets as a hedge against risk in case one of your bets flops.
“Putting too much money into a single asset class, sector, or geographic region can expose your portfolio to unnecessary risk,” Bajaj said. “Diversification can help reduce this risk by spreading investments across different types of assets. This also is true for diversification in companies that offer these products, too.”
People often bet big on one stock when they’re going for the home run of large, fast gains — but home run hitters strike out a lot.
“Putting too much faith in a single company or investment can be risky,” Weiss said. “While it’s tempting to go all-in on a stock that seems promising, overconcentration can expose you to unnecessary risk if that investment performs poorly. If that stock goes down, returning to where you were may take years.”
Focusing on Short-Term Volatility With Long-Term Investments
One of the problems with obsessing over your portfolio is that compulsively checking your returns can lead to panic selling and other emotional reactions to the market’s daily ups and downs.
“Getting too concerned with short-term volatility when you’re invested for the long term can lead to rash decisions, like selling assets during a market downturn,” Bajaj said. “It’s important to keep a long-term perspective and avoid reacting to short-term market fluctuations.”
It’s always good to avoid fees where you can, but paying for the guidance of a qualified professional is not a fee, it’s an investment.
“While there is a cost to hire a financial advisor, for many people, the benefits can outweigh these costs,” Bajaj said. “Professional financial advisors can provide personalized advice based on your specific circumstances and help you avoid costly investment mistakes.”
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