Investors have had plenty of investing crazes to ponder in recent months, from GameStop and SPACs to NFTs and cryptocurrency. But while it might be tempting to hop on the latest trend, it's smarter for investors to tread carefully, according to experts.
Buying hot stocks is more like gambling rather than investing for your future, says Chris Browning, founder of the podcast Popcorn Finance. "It takes it out of that realm of 'I'm doing things to help better myself for the future, I'm putting my money to work in hopes that I can retire' ... into making these very speculative plays," he says.
"You don't want to be jumping in and chasing fads, because that's typically when you end up losing money," Browning adds. "There's nothing wrong with being boring" when it comes to your investment strategy.
Other experts agree. Day trading, or buying and selling individual stocks to make a quick profit, isn't the best way to build wealth, Ben Carlson, a CFA and the author of "A Wealth of Common Sense: Why Simplicity Trumps Complexity in Any Investment Plan," told Grow. As studies have shown, investors often lose money that way.
"The slow, boring, 'get rich slowly' path is still probably the right path for the majority of people," he said.
Video by Courtney Stith
Many people want to do something "exciting" with their portfolio, like make a big trade or invest in something that's in the news, Browning says. But putting a lot of money in a volatile investment strategy and relying on it to "set you up for the rest of your life" is too risky for him.
The alternative is less flashy but more secure. "If you just do something so simple, something that you don't even think about, like investing in index funds for your work's 401(k) plan — like something that's so boring that you don't even think about — that's gonna be the best thing to set you up for your future," says Browning.
Plus, you're far more likely to see strong returns if you keep your money in a diversified portfolio for a longer period of time, Carlson said. Historically, investing in passive funds that track the S&P 500 yields better long-term results when compared to stock picking.
Video by Helen Zhao
There are many different ways to be "boring," or simple but effective, with your investments. You could set up regular contributions into an IRA or beef up your retirement savings contributions at your job.
Not making your heart race? That's the idea. "A better way to get started in investing is actually really boring," Christine Benz, director of personal finance at Morningstar, recently told Grow. "Buy a plain vanilla index fund or maybe a target date mutual fund. It's not a sexy message, but it's one that's been incredibly effective for a lot of investors for many years."
Another fan of simple, boring investments: Investor extraordinaire Warren Buffett, who routinely recommends investors buy passive investments. His favorite? Low-cost index funds. "In my view, for most people, the best thing to do is to own the S&P 500 index fund," he said at the annual Berkshire Hathaway meeting in 2020.
So don't focus on hot but potentially risky investments, says Browning. Instead, invest simply and use methods that have worked for the average investor — and can help you grow your wealth over time.
More from Grow:
- 39% of Americans have no money in the stock market and over 50% say it’s ‘rigged,’ survey finds
- ‘Never bet against America’: 3 pieces of great advice from Warren Buffett’s latest letter to shareholders
- Young investors have gone from ‘risk averse’ to ‘the opposite extreme,’ expert says: Here’s the better way