The Most Common Bad Investment Decisions that Screw Millions Every Year

I grew up in the heart of rural America, complete with rolling cornfields and a history of horror stories. We’ve all heard of the epidemics that are plaguing American life, including racial gaps, drug abuse, and health crises. What we don’t hear about enough is the lack of financial literacy, covering everything from budgeting effectively to understanding how to invest. The most common bad investment decisions are so widespread that countless people lose out every single year.

This is a much bigger situation than it seems. It’s putting your entire livelihood and lifestyle at stake if you don’t understand money. In my experience, you (literally) can’t afford not to. What, do you plan to leave your financial security in the hands of someone else? Nobody cares more about your money and well-being than you do – you’re the one that’s most affected, after all. If you’re just starting out on your investment journey, here’s nine of the most common bad investment decisions you do not want to fall prey to:

1. Not starting early, or at all

This is unquestionably #1 in ranking the most common bad investment decisions. Financial education continues to be a non-priority for schools, families, and communities across America; in a capitalist society like ours, this is a huge oversight and hurts the little guys the most. Unless you find online resources to learn about the most common bad investment decisions (like this one) how would you know the first thing about it? The term “index funds” isn’t even common knowledge for the beginner investor, nor has it ever been in history. Instead it’s real estate, stocks, and even crypto that are the flashy portfolio must-haves. Who can successfully win at these games, unless they’ve got a lot of capital in the first place?

When you’re in your 20s, that’s the best time to start building future wealth. Reaching six figures before you’re 30 years old means becoming a millionaire before you’re ready for retirement. That is a powerful position to be in and can be done on the most average salary. Yet this life-changing advice is drowned out by the complex and confusing of the investing world, discouraging folks from participating before they even begin.

2. Blindly trusting financial advisors

This one is contentions, but way too many of them are predatory or more interested in pushing a product than doing what’s best for you. 80% of them can’t beat the overall stock market anyway. You’re better off just buying a bunch of VTI or VTSAX and moving on with your life.

3. Not understanding how the stock market works

It doesn’t have to be this complex beast of unfathomable proportions. The simple explanation is: companies make money. More money means the company is more valuable. As long as you’ve got innovative people making the company better, you’re going to continue making more money. Since nepotism and prejudice make up a hefty part of corporate drones, however, even the best companies can fall thanks to these diseases.

Since you don’t know which companies will fall from grace and/or eat pavement, the most simple, easiest way to see good returns is to invest in all of them. Ta da! But that’s boring and people like to brag about how awesome they are with their stock choices. It’ll work out much more nicely if you choose the boring way into it. In my case I grew 20x my wealth in four years’ time. Not from investing in any particularly flashy enterprise, but by staying the course and throwing extra savings into VTSAX.

4. Not understanding much about money in the first place

70% of Americans fail a test on basic financial literacy. Take the test yourself and, if you’re part of that 70%, make the time to get yourself financially literate. I suck at complex math so rest assured, any math involved is easy, middle-school stuff.

5. Not realizing you need to actually invest your money

You open an investment account – a 401(k), IRA, taxable, whatever. You link your bank account to your new investment account. Then you deposit the amount of money you’re planning on investing; could be $100, could be $1,000, could be whatever amount you like. And then you believe that’s all that’s necessary to “set it and forget it”.

Nope. Wrong. Do not pass Go, do not collect $200. Actually, that money’s not collecting anything; unless you actually purchase index fund shares (or whatever you want to invest in) that money is going to sit in a money market account making $0 interest. Thanks to inflation that means you’re getting a negative return every single year that passes while it sits there. Don’t do this.

6. Panicking at the wrong time and selling it all

No loss is permanent until you sell. There are very few times selling index funds at a loss will actually help you, and to take advantage of those times you need to have a solid plan in place and a meticulous understanding of every US tax code subsection. If you’re investing in index funds, you know your losses will bounce back thanks to human innovation continuing to bring value to publicly-owned companies. If you’re investing in very few companies, however, that’s not a position I’d like myself to be in.

7. Investing money you can’t afford to lose

The key to investing, especially index fund investing, is knowing for how long you’re going to keep your money invested. The longer that time frame is, the wealthier you are going to be. The shorter your time frame is, however, the more at-risk your money is of a bad year. The stock market earn 10% a year on average; “on average” being the key phrase here. During bear markets or crashes, that investment is going to lose money in the short term. Leave it in index funds for long enough and they’ll recover once more, but that won’t help if you need the cash NOW. Only add the amount of money you can afford to lose, or, at least, not have to touch for several years down the line.

8. Not knowing what you want to do with your future riches

GOALS AND DREAMS ARE STEP NUMERO UNO! If you don’t know for what end you’ll use the money for, the end will become “accumulating more money”. That’s a depressing, even repulsive, end goal to have. You owe better to your future self.

9. Going into investing without much planning

I love it when people email me or DM me on Instagram detailing what they’re currently investing in. And then I cringe when someone in their 20s mentions they’ve got money invested in individual stocks. Guys, I’m begging you to please do yourself a favor and decide what you want your investment allocation to look like. Park most of it into an index fund like VTSAX or VTI that tracks the overall stock market; ideally you’re putting 100% into it but hey, you can give yourself some wiggle room for other investments here.

When you’re first starting out you want to park your money into what’s most guaranteed to give you double digit returns. No singular company or corporation can completely assure you of that. Once you hit six-figure wealth then you can put any extra money towards whatever you feel like. Just please stick to index fund investing as the easy, simple path to wealth.

Cover image credit: Patrick Fore via Unsplash