5 Overrated Pieces of Investing Advice

The generic, frustrating, outdated strategies losing you money…

Many people think they know what they’re doing when it comes to investing. They’re so confident they share and give advice. But so many of those people are flat-out wrong. I for one am tired of hearing and reading this outdated advice over and over again. Today I decided to do something about it…

The following 5 pieces of investing advice will lose you money. Too many people blindly follow these generic and not-so-useful tips. But I’m not here simply to rant. I will, of course, pepper in my underrated advice and simple investing philosophy throughout. My goal is to help you earn more in the market and spend little to no time doing so.

1. Invest in companies you know and love.

Nope.

Many people get started with investment by buying a few shares or portions of shares in companies they use, love, and trust. If that’s what gets you excited to get started with investing… sure. Do that. I did that too. But after learning the basics, I ditched this advice and strategy.

Some of the most misinterpreted words in investing are Peter Lynch’s “Invest in what you know.” It means to research what you know and then consider buying. I would never recommend you blindly invest in companies because you shop from them. You likely don’t understand the bigger picture when it comes to the business, their cash flow, and their long-term success plan.

With investing, you must control your emotions. You’ll make errors if your emotions are tied to your investments — and your emotions are tied to companies you love.

How do I pick individual stocks? I don’t. I invest in most or all of the stocks. I buy a low-fee S&P 500 index fund that includes the top 500 companies in the U.S. (Usually VOO). Odds are, a good chunk of companies you love are already included in the S&P500, so you’ll have that and lots more.

The best part is that it’s self-cleansing. As companies falter, they fall out of the index. As new businesses thrive, they enter the index and you automatically invest in those. This way, you’re always investing in winners, and not with emotions.

Notable companies that joined the S&P 500 in 2020 include Tesla, Etsy, Domino’s and… a dozen other companies I’ve never heard of that I have no time to research. And that’s the point. It’s a waste of time to research them all.

2. If you have a lump sum of money to invest, dollar-cost average it into the market.

Overrated.

According to a Vanguard study in 2012 that analyzed decades of data over a century, they found that lump-sum investing (LSI) beat out dollar-cost average investing (DCA) two-thirds of the time. Over 10 year periods, LSI beat out DCA by 2.3%. That’s not by a huge margin but even that can seriously add up over time.

I used to only recommend DCA. It’s safe. It’s easy. It can be automatic once you set it up. But I continued to hear the argument for LSI so I looked into the Vanguard study and now, going forward, I will recommend LSI if you have cash — all of it (assuming you have an emergency fund).

Don’t hold out and utilize DCA in hopes that the market is going to go down. That’s speculating — never speculate. Further, disregard the headlines that the market is at an all-time high. It hits an all-time high all the time. Over time, the market always goes up. Get in so you don’t miss out.

That said, DCA is great when you don’t have a lump sum to invest. Invest as you get paid. I still do this. This year, starting in April, I invested $250 weekly into my Roth IRA. Last week I maxed it out at $6,000. DCA plus automation can be a powerful strategy.

However, if you have $6,000 now you want to invest — put it all in a Traditional IRA or Roth IRA asap. Snag some VOO, VTI, or VTSAX. Disclaimer again: I’m not a certified professional.

3. Decide on investments based on your risk tolerance and invest based on goals.

Huh?

For the beginning investor, investing based on your risk tolerance is counterintuitive because you likely don’t know your risk tolerance when you’re getting started.

Risk sounds bad, right? It’s not. Your risk tolerance should be high. Yes, some years you will lose money but, for the majority of years, historical returns have been positive. Sometimes very positive. If you have a long-term mindset and you’re young, you have plenty of time to ride out bumpy periods.

In terms of goals, isn’t everyone’s ultimate goal to make as much money as possible? If so, low risk will equal low rewards. You’ll need to take on higher risk for higher rewards. You need to become a master of your emotions and practice patience to do so.

I do set goals but they are based on things I can control. I cannot control the market. Instead, my investing goals are simple and action-based:

  • Lump-sum invest extra funds.
  • Invest consistently leveraging DCA and automation to max out all available retirement accounts.
  • Invest in the top 500 companies.
  • Spend little to no time researching individual companies or market returns.

Instead of trying to figure out your risk tolerance and goals, invest consistently, buy all of the stocks (or the top 500 companies), and keep your emotions in check. If you think you’re an emotional knee-jerk reaction kind of investor, that’s what you need to work on. Not goals.

Learn the basics and get invested asap. Don’t research individual stocks. Research how investing works and lock in on your long-term strategy. Steal mine if you’d like by watching videos from my new investing playlist.

Don’t set goals around returns and timelines and risk. Set goals based on action. Work on your emotions and develop a patient, long-term perspective.

4. You should always aim to beat the market. React quickly. Buy low, sell high!

No. No. NO!

It’s not about buying low and selling high — it’s about buying quality and not selling often. I don’t plan to sell at all until retirement when I must.

If you’re a poker player, you know quick action and reaction can spell doom. The best players (and investors) weigh their opportunities but rarely take action. As Vanguard founder Jack Bogle once said: “Time is your friend; impulse is your enemy.”

When it comes to passive low-fee index fund investing, which is what I advocate for, keep this in mind: Around 90% of actively managed mutual funds, as opposed to market-matching index funds like VOO, don’t beat the market. No one can consistently time the bottom or top of a stock’s price. No one. Period. There’s no sense trying.

If you avoid investing because it’s at an all-time high you’ll miss the next run-up. And the run-up after that. There’s a reason it’s always at an all-time high — the market always goes up over time. If you try to time the market, you might be waiting for a long time and you’ll be missing out on gains and big individual days. Not investing at all is a mistake.

No stock is a sure thing. No one can see 3, 5, or 10 years in the future. As we learned in 2020, things can change quickly. And then change quickly the other way. Don’t try to beat the market. Get in. Leverage LSI, then DCA. Try to match the market by buying all of the stocks. I’ll take my stress-free no effort 8% to 10% over the long-term any day over studying and reading investment news constantly.

The reality is, increasing your savings rate and investing your savings is more important than trying to beat the market. I can’t emphasize that enough but I’ll save that for an underrated advice follow-up article…

5. You need to diversify with a balance of stocks and bonds.

This is the worst one of all…

Over longer periods of time — decades, not years — stocks have returned more than bonds. The more decades you have ahead, the more your portfolio should be in stocks. This will help you fight off inflation. I’m ultra aggressive as a 36-year-old. Anyone under 40 should be. When I say ultra-aggressive, I mean roughly 98%+ of my investments are currently held in stocks. Only 2% are bonds.

The Pareto Principle (aka the 80/20 Rule) is useful to apply to the stock market and investing. A handful of the most successful stocks over a handful of days over decades drive the bulk of all returns. Therefore, you could be missing out on those blue-chip stocks and phenomenal days just because you’re a little worried the market could experience some softness.

I’m paraphrasing but Warren Buffett said diversification makes very little sense for anyone that knows what they’re doing. It’s protection against ignorance. I encourage diversification when it comes to stocks (I buy 500 at a time) but not diversification when it comes to stocks vs. bonds. Get educated. Get aggressive. Stay patient.

Final Thoughts and Takeaways

Learn about investing but keep it simple because the more we learn about investing, the more we want to start doing exotic things. That leads to greed, laziness, ignorance, and lower-than-expected returns.

Then develop a high-risk tolerance mindset. Stay the course. Invest for decades and think with a long-term perspective. Don’t get emotional. These are all themes I’ve covered because they’re timeless investing strategies that are far better than overrated and outdated investing advice.

Buy low-cost index funds that track the S&P 500 like VOO or VTSAX. I recommend M1 Finance and maxing out your tax-advantaged retirement accounts before you consider individual investing. I preach automation, the set-it-and-forget-it approach.

My tips are not all-inclusive and you can disagree or take a different approach. I fully encourage you to continue learning and researching and not taking every piece of advice for face value, including mine. Ask questions. Read books and more articles. Watch investing videos. But don’t obsess. You’re better off using your time to side hustle, creative passive income streams, or invest in yourself and learn new skills.