Bad investment advice you should avoid

There’s a lot of investment advice out there: Some good, some bad and some downright awful.

Your parents, friends and co-workers might have the best of intentions when they offer investing advice. But following their recommendations without doing your own research can be detrimental to your portfolio’s performance.

In this article, we’ll discuss a few examples of bad investing advice to avoid, as well as some tried-and-true principles for building wealth over time. A fee-only financial advisor can also help you make smart investment decisions by offering personalized guidance tailored to your specific risk tolerance and goals.

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5 examples of bad investment advice

When you start investing, it’s important to learn from the best. But it also pays to learn from the worst.

Here are a few examples of bad investment advice to watch out for. If any of this advice sounds familiar, it might be time to meet with a financial advisor.

1. “This investment has no risk.”

One of the most misleading pieces of advice is the promise of a risk-free investment. In reality, all investments carry some degree of risk.

Some investments are considered less risky than others, such as U.S. Treasury securities and money market accounts. U.S. treasuries, for example, are backed by the full faith and credit of the federal government, while money market accounts are insured up to $250,000 per account owner by the Federal Deposit Insurance Corporation (FDIC).

However, even the “safest” investments aren’t entirely risk-free. For example, while the U.S. government has never defaulted on its debt, there’s always the (very slim) chance it could, which means U.S.-backed securities still carry risk.

Whether it’s market volatility, credit risks or liquidity concerns, understanding and managing risk within your portfolio is an integral part of investing. While diversification can help mitigate risk, it’s essential to acknowledge that no investment is entirely risk-free.

2. “You should buy (this hot stock or investment).”

Whether it’s the latest meme stock or the hottest cryptocurrency, making investment decisions based on market trends and fads can be a recipe for disaster.

Stocks are subject to volatility, and their value can fluctuate dramatically in the short term. Just because your neighbor or workplace buddy made a killing on a particular investment doesn’t mean it’s right for you. Even if it was a good purchase, by the time you hear about it and buy in, the opportunity for major growth may already be over.

Additionally, heavily investing in just one or two stocks is incredibly risky. You could suffer tremendous losses if one of the companies hits financial trouble.

Instead of chasing hot stocks, it’s wiser to focus on a well-researched, diversified portfolio that aligns with your long-term financial goals. Broadly-diversified index funds and exchange-traded funds (ETFs) are considered some of the best investments for new and experienced investors alike because these funds diversify your portfolio at a low cost. Some of the wealthiest Americans use index funds to build their fortunes, including legendary investor Warren Buffet.

3. “You should buy low and sell high.”

“Buying the dip” is a common phrase in the investing world. It refers to the practice of buying a stock after it decreases in price in hopes of selling it later for a profit after the price rebounds.

While the concept of buying low and selling high sounds simple, the truth is predicting short-term market movements is notoriously difficult, even for seasoned professionals.

A smarter investment strategy is dollar-cost averaging, or the practice of consistently investing a fixed amount of money over time. This helps smooth out market fluctuations. It’s also a less stressful way to build wealth.

4. “Cash is king. The stock market is too risky.”

The federal rates fund lingered around 0 percent for years, making it nearly impossible for savers to earn much money on their cash. But after more than a year of aggressive rate hikes from the Federal Reserve, savers are enjoying some of the highest interest rates in years on cash securities, such as high-yield savings accounts, money market funds and certificates of deposit (CDs).

With many online banks and the best credit unions now offering 5 percent on FDIC-insured fixed-income investments, cash is alluring once again. In fact, assets invested in U.S. money market funds reached a new all-time high of $4.9 trillion in March 2023, according to Reuters.

However, it’s crucial to consider the bigger picture: High rates won’t last forever.  Most financial experts agree that the Fed is probably done raising rates. As inflation continues to cool, the central bank may start cutting rates as soon as next year.

While cash may seem appealing now, the stock market has proven to be a superior wealth-building tool over time. While past performance is no guarantee of future results, the S&P 500 index’s return is around 10 percent annualized over time on average.

Cash still has its place in your portfolio, especially if you’re saving for a short-term goal like a home or you’re nearing retirement. But if you’re looking to grow your money long-term, don’t shy away from the stock market. It might be more risky, but investing offers the greatest potential returns historically. Cash just sitting in a bank account, for example, risks losing purchasing power to inflation over time.

5. “Your home is an investment.”

Owning a home is often touted as a smart investment, but it’s important to approach this advice with caution.

While homeownership can increase your net worth, the true cost of owning a home goes beyond the purchase price. Maintenance, property taxes and mortgage interest can add up quickly, potentially offsetting the appreciation in your home’s value.

Tying up a bulk of your money in a home also carries liquidity risk. Unlike more liquid assets like stocks or bonds, selling a home is a time-consuming (and often costly) process. If you need quick access to cash or want to jump on new investment opportunities, this lack of liquidity can be a huge drawback.

Remember, buying a home should be a lifestyle choice, not your primary investment strategy. If you get lucky and make a nice profit on the sale of your home later, consider it a bonus.

Good investment advice to follow

Get-rich-quick schemes and bad financial advice are plentiful. But if you want to steadily grow your money, sticking to a few established investing principles is the way to go.

• Invest for the long term: Rather than chasing short-term gains, focus on building a portfolio aligned with your risk tolerance and stick with it long term. This approach allows you to weather market fluctuations and benefit from the power of compounding over time.
• Get started early: Your money needs time to grow, so it’s important to start investing early. You can start small and keep it simple in the beginning.
• Diversify your portfolio: One of the fastest, most affordable ways to diversify your portfolio is with low-cost index funds and ETFs, especially those that track a stock index, such as the S&P 500. These funds give you partial ownership in hundreds of America’s biggest companies across multiple industries with a single share.
• Practice dollar-cost averaging: Investors who buy and hold investments do better than investors who try to time the market. Dollar-cost averaging can help you mitigate market volatility without the stress of predicting short-term movements.
• Stay informed and educated: Knowledge is key in the world of investing. Stay informed about market trends, economic indicators and the performance of your investments. It’s also good practice to periodically rebalance your portfolio so your investments stay aligned with your target asset allocation.

How to find good investment advice

One of the best ways to get reliable, unbiased investment advice is to work with a fee-only financial advisor.

An investment advisor can act as your partner in achieving your financial goals. They can create a tailored investment strategy, select investments and help you manage your portfolio over time.

Here are a few tips for finding a good financial advisor:

• Make sure they’re a fiduciary: You want to find an advisor who works for you and is paid only by you and other clients like you. A fiduciary is required to put your best interest ahead of their own or their firm’s. That means they won’t push products that don’t align with your goals, or earn commission from those products.
• Check their credentials: A good place to start is the BrokerCheck tool from the Financial Industry Regulatory Authority (FINRA). Here, you can research professionals who sell securities, provide advice or both. It offers an overview of an advisor’s work history along with their firm’s history. You can also check the  Investment Adviser Public Disclosure tool from the Securities and Exchange Commission (SEC)

• Check their professional designation: When seeking a financial advisor, look for professionals with well-known designations, such as chartered financial analyst (CFA) or certified financial planner (CFP). If you’re unsure about a potential advisor’s designation, use FINRA’s Professional Designations lookup tool to check.

If you’re just looking for someone to invest your money and periodically rebalance your portfolio, opting for a robo-advisor might be a better option than hiring a human financial advisor.

Robo-advisors, such as Betterment or Wealthfront, can help you create a tailored portfolio based on your goals and risk tolerance, and charge you a lower fee, too. You can get started in minutes online.

Bottom line

Bad investment advice is everywhere. Just because advice comes from someone you admire or trust — like your boss or your favorite Tik-Tok influencer — doesn’t mean you should take it at face value. Do your own research and defer to the experts if you need help. The more you learn about investing, the better equipped you’ll be to spot bad advice from a mile away and steer clear of it.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.