How To Spot Bad Investing Advice
“All that glitters is not gold.”
It’s within human tendency, especially in western culture, to chase what is new, innovative, and well, shiny. I personally call it “shiny object syndrome,” or the condition of distraction.
This “condition” hits high achiever, entrepreneurial minds harder than most. Entrepreneurs are risk takers, do-it-themselfers and tend to dance to the beat of their own music. With promises of evolutionary technology or products that will make that path easier, these people are vulnerable for falling into dangerous ways of investing.
Shiny object syndrome is why people who consider themselves “smart” end up in such hot financial messes. I know this to be true because this was 20-something me.
Shiny object syndrome runs rampant in the world of investing.
I unfortunately see this phenomenon quite frequently in the investing world. Investing, specifically in areas like the stock market, attract these kinds of personalities. People who believe they are special and that they can time the market. They believe that they can “beat” the traditional stock market averages over time. Despite what years of data and research says.
But before we dive into more on investing, let’s start with a cautionary tale, because it seems like, each day, I have to unfollow some new “investing guru” who has built a beautiful Instagram profile claiming to want to help people with personal finance. Then, they go on to note that they can beat the market and are here to teach you how to do so as well. All you have to do is sign up for a free 1:1 coaching session with them! What a steal! Except this is where they pitch paid coaching or their own course to teach you what they really know. There’s no doubt in my mind that the course is beautifully designed too.
This is all marketing, not personal finance literacy. The sad part? Their followers think they are awesome and oh so shiny. All cheering them on, and asking how they do it. Trying to get rich fast. Knowing what someone else doesn’t.
Listen, there are amazing accounts out there in the world. People who do have coaching and courses who can teach you about investing the right way-- but it usually feels less shiny. Why? Well, a solid investing plan over the long haul is the MOST boring.
Set it and forget it. Every seven to ten years, you change your portfolio to include more bonds and less stock. Moving your stock percentage from 90% to 80%, and bonds from 10% up to 20%. Woo. Did you feel the adrenaline course through your veins?
Yea, I didn’t either.
Still no? That’s because slow, less flashy investing is what works. But people get WAY less hype over this more simple way.
Oscillation, high markets, low markets, inevitable stock market crashes-- all of the ‘ins and outs’ are much more simple to weather than any marketing guru wants you to believe.
These marketers bring the shiny, and often the risk. Not the education and foresight you need in the investing realm.
Let’s also not forget the gurus which target emotional appeal. If you’re sitting there thinking, “But I don’t need the latest and greatest. I’m just scared of investing” -- these ‘gurus’ target you.
The tugging on your heartstrings story, where marketing gurus tell you that your investments should match your dream retirement, keeping your loved ones safe, avoiding risk, etc.
They tug on your heartstrings and convince you that you should not “go it alone” because this is too hard! Investing is too complicated. It is too complex. No one understands it. So, they offer you things (such as terrible annuities, sigh) that are “guaranteed.” Things where you will “never lose money.” And even chose your investments based on “your risk tolerance and comfort level.”
How can they even make these promises? Sigh. Again, investing is not nearly as complex as marketers want you to believe. Simply put: They want your money. If you are scared, you will hire them to do it.
While I do think a good retirement plan should encompass retirement dreams, loved ones and risk assessment, it’s unlikely you need to spend money on investing advice when books and blogs can teach you all you need to know for cheap or free.
For the first few years, when I switched to all DIY investing -- I would still meet with a financial planner. We would take an hour and review my plans. My index fund selections. Current net worth. Investing plans for the year. How real estate could impact this. And he would tell me things looked good and I would go on my merry way. After a few years, I no longer felt these were quite as important. We are now all DIY over here on our investment portfolios.
Now, lets flex our brains on how to spot some BAD investing advice, that is just too well, shiny. Along the way, we will dive through some real knowledge about the boring, tried and true methods the savvy use.
1. Do the headlines and graphics make it sound just too good to be true?
- “I’m beating the market!”
- “I have an 18% rate of return!”
- “My funds are doing way better than the S&P 500!”
- “Guaranteed returns”
- “I will teach you what single stocks to invest in, to beat the market!”
Legit, guys, some of this is just fancy gambeling.
If you see any of the above proclamations, run. Run far away. These are blanket statements meant to pull you into giving these ‘investing gurus’ money to learn what they know and do.
Most of these statements depend on what someone chooses to buy for their investments.
Some people love their single stocks. In 2020, people everywhere were talking about all the single stocks they just “had to buy” as the market fell. The influx of messages I got asking what I was buying were off the charts. My answer? I wasn’t. I do not like gambeling, nor do I think I know the market any better than the next person on the street. Did you know that 65% of people believe that they are of above average intelligence? And these are the people who think they have an edge, and that they can figure out how to make money better and faster then the gal next to them. Even if I am reading all the time, there is no way to always pick winners. The truth of the matter is, most people who are in it for the long haul set it and forget it. They don’t gamble the money that they need for their future selves in retirement -- on a single company (or three) doing well. Instead, there are Index funds.
I LOVE INDEX FUNDS.
Index funds (a special kind of mutual fund) are a collection of stocks from many companies. Instead of depending on the success of one company, you get the built in diversity of MANY companies all in one nice little bucket.
BUT WHAT IF I LOSE MONEY?
When you are investing, there is always a chance you will lose money. However, taking money and burying it out in the backyard doesn’t help either, since inflation over time will eat away of the value of that money from whatever time period it was buried in. And most savings accounts are barely different from the returns you get on your buried backyard money. So, as you learn more about investing-- you will begin to hear index funds are safer for four key reasons.
1. Low cost (which we will dive into in a bit...).
2. Built in diversification. (which we already covered a bit above.) The built in diversification of index funds comes from them being made up of hundreds (usually) of companies.
3. Passive management. Index funds are passively managed-- not by humans who actively decide when to buy, trade, and sell-- but through automation and algorithms.
4. Self-cleansing. New companies are added, and struggling companies are removed according to the algorithm. I think this one is my FAV. Because, think about it-- if you are a fancy gambling choosing single stocks, and these single companies go out of business, you can lose money. However, if one of the many businesses in an index fund fails, it is simply removed.
Okay, back to point number 1 & the shiny marketing gurus.
So, all that being said, can these thrill-seeking investors ever REALLY begin to compare their investments to the top publicly traded companies? What happens if the company they have all the single stocks with, goes under? What are the odds? (it happened in 2008, many dot com companies are no longer with us) Does it have the same level of risk as the S&P 500? Are the returns really that much better, or was the market just amazing at that time, so say an 18% rate of return is not anything fancy? In fact, the S&P 500 had a 30.43% rate of return in 2019. Yet I was STILL seeing investors promising things like an 18% rate of return. And people were commenting and applauding them, asking how they did it. Sigh. Ah, yeah you SHOULD have great returns right now bro. Cool story.
Funny, when shit hit the fan in 2020, it was radio silence from many of these accounts. Meanwhile, over on my page as well as the pages of many investors who also do buy and hold, long term Index fund investing, we are all still sharing our numbers and returns. Yeah, there is nothing to be hype about. And, they may leave you feeling blue. However, it is real and all about weathering storms in the bad years, so you can enjoy the returns of the happier, bull market years. And sharing HONESTLY the bad with the good.
People who claim to beat the market by “a lot” make those little hairs on the back of my neck stand up. I mean, even Warren Buffett states that HE cannot beat the S&P 500 over time… but an instagram marketer can? Sure...
2. Has this person been financially put to the test?
I only read investing advice and philosophies from people who have been through one of the BIG, UGLY events. They know what it feels like to look at a down portfolio… to watch their balances drop 30-50%.... and they also know what it feels like to stay in and ride that roller coaster up the next hill.
Role models like John Bogle and Warren Buffett have been put to the test, and no they are not advocates for timing the market either. People who like a “get rich slow” path. Those are the ones you should seek out. The ones talking about what they did, and would do differently, based on the last time they were there. Learn from the experienced.
3. What is this person personally investing in? Is this what an investor that’s been financially tested does?
See where the money is. What kinds of investments do they keep their money in? If you have to PAY to know, then search elsewhere. All you need to know can be found for free online. When checking out many Instagram ‘investing gurus” -- here is what I keep finding:
They LOVE picking stocks. Or, even worse, BITCOIN. I mean I cannot even. Some have portfolios with up to 80% individual stocks. No wonder, in 2019-- given our current happy market conditions, their rate of return is better than the S&P 500. Because this is a lot more RISK. Where are these folks in 2020? Rather quiet.
WHY INDEX FUNDS
People who have weathered storms and proven their track records love index funds. Index funds are able to be low fee as well, because they are passive, based on a specific “index” designed to match the performance of a specific set of stocks. There are all kinds of Index funds nowadays. They are a collection or group of stocks meeting a specific criteria. The easiest to understand is just a total stock market index fund, which has legit EVERY single stock under one umbrella. But there are tech index funds, real estate index funds, even sustainable company index funds.
Let’s take a moment, because the idea of their being TYPES of index funds will make some people nervous. OH my goodness, choices. Let’s quell those fears.
Let’s consider various kinds of index funds first:
A “total stock market index fund” would contain funds from, you guessed it, the whole stock market. An example is everyones FAV fund, VTSAX, which was made famous among nerds like me by JL Collins.
What about a “large cap” index fund? All the funds from all the “large-cap” companies. What are those you ask? Let us see what Google says: “Large Cap Stocks refers to firms which have a market capitalization of more than $10 billion.” If you thought Apple, Google or Microsoft, you are crushing this!
Ugh, but now there are just so many to choose from, how does one decide?!
Again, I like to see what the REAL gurus do.
Since I was raised on Dave Ramsey, let’s start there. Dave invests, 25% into 4 kinds of funds:
25% Large cap, or sometimes called growth
25% Mid cap, sometimes called growth & income
25% Small cap, or aggressive growth
PS. for YEARS Dave has talked about mutual funds. Now, he sometimes will say index funds as well. Keep in mind index funds ARE a type of mutual fund. Plus, they are low cost.
Next, let's keep it REAL simple by looking at the JL Collins approach from the Simple Path to Wealth.
100% VTSAX. That is it. A "one fund" portfolio. This was developed by Vanguard's founder, John Bogle. He is famously quoted with saying,
"Don't look for the needle in the haystack. Just buy the whole haystack!"
VTSAX is Vanguard's Total Stock Market Index Fund. (or you can swap VTSAX for any company’s total stock market index fund option)
Finally, I will also mention one exciting NEW kind of fund that has caught my eye: Target date INDEX funds. So, a target date fund is a fund that you choose based on the age at which you want to retire. As you move closer to retirement age, it automatically adjusts to include more bonds (safer, but lower returns) and less stocks (higher return, less safe). Traditionally, target date funds SUCK. Why? Because they legit have some of the highest fees for management. So, I was a super happy camper when I started to see some companies out there offering target date INDEX funds, with those dreamy index fund low expense ratios.
Still want more portfolio options? You MUST read this article on 150 (now 200!) different portfolios by famous investors, that are better than yours. This is one of my all time favorite blog posts, so needless to say I was hype when it was revised and expanded in 2020. While we are hitting on the idea of cost, let’s dive in a bit more.
What makes index funds low cost?
Index funds are not actively managed. Management costs more. This means lower fees and expense ratios. This means less years shaved off your retirement nest egg. THIS IS A BIG DEAL. For a few years, I did not know the perks of index funds. I just built my portfolio in my employer 401K by talking to a young, retirement advisor working for my employer. We chose funds “based on my risk tolerance” which I later found was just shitty advice IMO. But I hadn’t tried to learn about the world of investing YET.
By the time I better understood the POWER of index funds (thank you, The Simple Path to Wealth), my fees were rough. How rough? Well, if you haven’t tried my favorite free tool from Personal Capital, now is the time for you to have a free reality check like I did. I learned from their fee analyzer that I was losing nearly 5 years off my retirement nest egg due to fees and expenses. After swapping for index funds that performed the same, I will lose less than a year of my nest egg to fees. Winning.
Now, let’s walk through an example of why index funds would be preferred over choosing single stocks.
Take Joe Smith’s Drink Company. You adore the company and they currently adore you right back with an 18% rate of return. Look at you “beating the market.” You spend hours staying on top of what the company is doing. They just landed a big contract with Target. You do your homework. But then, the market crashes. Since it is 2020, let’s say Coronavirus hits, and Joe’s has to lay off all of their employees. They are a non-essential business. Suddenly, Joe Smith’s Drink Company is out of business, due to being over-leveraged. One of the many victims of this crash.
You didn’t see this coming-- because insider trading is illegal. You can't “ride back up” the stock of a company that is gone.
Now, let’s say that no matter how much you love Joe Smith’s, you try the advice of Mr. Bogle and choose a total stock market index fund that has Joe Smith’s Drink bundled within it. You opt to buy the haystack.
When the market crashes Joe Smith’s goes under, the company is removed from the algorithm and another new company will take Joe Smith’s place.
In this situation, you’re still able to “ride” the roller coaster, which is the stock market, because of automatic changes made inside your index fund. Changes which were made while you sunbathed in your backyard (because Corona, shelter in place life) or sat at your desk. Hello, passive investing life.
You trust the plan and you know you can’t time the market, so you stay in. You ride out a few crappy years until things look up and rebound to their “pre-crash” levels. You ignore all the chicken littles of the world yelling in the news to get out now, the sky is falling like the market. But you are on the slow and steady plan. Suddenly, the most boring investing method, over time, seems like much less of a headache.
Why do things go back up? Oh and where does this diversification thing come in?
Because these are businesses. Businesses sell tiny shares of ownership in their company to raise money to do more of what businesses do. Businesses are what the stock market is composed of.
You purchase shares or tiny bits of ownership in real companies. Target, Amazon, Walmart, Apple, etc.
Do you think these companies will be around awhile? Realizing this was such an “Ah ha!” moment for me. I do not think all businesses will cease to exist, because people are entrepreneurial and competitive af.
This made investing feel more friendly.
Let’s try Target. I love Target. I love the dog, the logo, the mascot… I even love the smell of Target.
If all the big box stores take a hit in a recession, my bet is that Target will eventually come back. Target has brand loyalty and excellent partnerships.
No matter how much I love them, I will still not put all of my eggs into the Target basket.
However, I would put all of my eggs into a single fund like a Total Stock Market Index fund, because it is not really “one basket.” It is like buying the entire Easter egg hunt. I will take all the eggs and all the baskets, thank you very much.
I could see the value of these companies go down over time, and back up with the market. However, I believe some companies are here for the long haul. Even if they are not– you, my smart friend, chose index funds.
I’m sure a new, up and coming, future giant company would be more than happy to take their place within your automated index fund.
4. Are they talking too much about credit scores?
While we are talking about sham advice, I have to include this. I do NOT believe in credit repair. Do not PAY someone to “fix” your credit. Your credit score will automatically rise as you get your personal financial shit together. You do not need to “work on” anything except good money habits, paying down debt and paying your bills on time. Do these things and your “credit score” will fix itself. Now, if you genuinely have things that are incorrect on your history, DO contact each of the three credit bureaus to correct any inaccuracies. Because, unlike Dave Ramsey, I believe in the power of credit scores because I buy real estate.
These folks tend to put the cart before the horse. They say fix your score, but in reality it is fix your money habits and your score will follow. The score is secondary. What you are doing with money, and if you are being a good or bad steward of your money, will reflect in your score.
5. How do I keep learning how to spot these sham accounts?
Reading is key. Education is the path to smart investing.
My all-time favorite book is the Simple Path to Wealth by JL Collins. If you are not a book person, he also does a stock series on his blog.
If you got lost and overwhelmed by this blog post, and need some very basic education, I started first with Retire Inspired by Chris Hogan. It is a great read for scared newbies, but please do not let your learning end there.
There is an important world of expense ratios and fees out there this book does not touch, and, again, it is not hard to learn. Master this first, friends, because the world of real estate is a LOT more tricky. I hope this helps!
Stay educated on investing and be forever wary of things that appear a bit too shiny.
Happy learning, aspiring retirees!
Sarah Brandenberger is the founder of Nerds Guide To Financial Independence, a brand dedicated to showing that financial independence is possible through real estate investment. She began her debt free journey in 2017 and quickly became a voice for budgeting and personal finance information as she and her husband paid off over $100,000. They discovered real estate investing and now own four properties while help others towards the path of FI.
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