Don't try to 'pick winners': This is the 'only way to build legacy wealth' as an investor, claims financial planner

"The people who pick stocks for a living are paid millions of dollars and only get it right half the time."

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Even though it seems like everyone and their mother began trading stocks in the aftermath of pandemic-related lockdowns, there are still plenty of folks that brokerages are looking to sign up: 44% of Americans don't own a single stock, according to the most recent data from Gallup.

If you're among that number, you may be receiving variations on the same message: Choose the right investments and you can strike it rich.

It's a dangerous idea, says Tim Sobolewski, a certified financial planner with the Financial Planning Center in Buffalo, New York. "They talk about building generational wealth by picking stocks, but the people who pick stocks for a living are paid millions of dollars and only get it right half the time," he says. "The only way to build legacy wealth is to be broadly diversified: Owning the market and not trying to pick winners."

When it comes to investing, it's important to remember that returns aren't guaranteed, especially in the short term, and that markets can go down as well as up.

Given that understanding, here's how financial experts say you can get started investing for the long term to build wealth.

Establish your financial priorities

The first step toward becoming a successful investor is knowing how much money you have to invest, says Tess Zigo, a CFP at LPL Financial in Palm Harbor, Florida. "I always believe that cash flow is king," she says. "Realistically, you need to know how much money is coming in and going out the door as a baseline. In a perfect world, everyone is going to be at a positive number."

If you find that you have a cash flow surplus at the end of each month, you're almost ready to start investing. You'd be wise to make sure you're working toward covering some other bases as well, though, Zigo notes. If you don't have an emergency fund, for instance, she recommends diverting at least some of your funds toward creating a safety net for yourself.

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"Everyone's situation is different," she says. "But if you have liabilities you're responsible for or if you have children, you absolutely need emergency savings."

Paying off significant amounts of high-interest-rate debt is also worth prioritizing, she says. Think of that as an investment, with the interest rate you owe representing the return. "If you have credit card debt with a 30% APR, I would not be focused on investing," she says. "You're not going to get 30% in the market."

Prioritize tax-advantaged accounts

Even if you have multiple financial priorities that need your attention, it's smart to do at least some investing for your future, says Sobolewski. "It's not a good idea to focus solely on paying off debt or setting up an emergency fund," he says. "It's not going to cost much of anything to put 5% toward your retirement."

The first place to focus, investing-wise, experts say, is on your workplace retirement account, if you have one, which may come with a matching contribution from your employer. "We like to refer to that as 'free money,' and it is," says Zigo. "If I'm putting in 3% of my money and you're putting in 3% of your money, sign me up! I'm taking your money."

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From there, you have a few choices for your money that depend on how you plan to use it. If you're saving for a long-term goal, such as retirement, experts recommend saving through a tax-advantaged account such as a Roth IRA or a health savings account, if available to you. Provided you meet certain qualifications, both allow you to withdraw your investments free of tax, depending on when you withdraw the money and how you spend it.

"It's hard to say that one of those is better than the other," says Zigo. "If you've maxed out both, then I might go back and max out my 401(k)."

If you're saving for a intermediate-term goal, such as buying a house, you may want to open a brokerage account, suggests Sobolewski. You'll owe capital gains tax on any investments in those accounts that you sell for more than you bought it for, but the key is that the money is easily tapped, he adds: "You want to save for those goals in an account you can dip into at any time without paying penalties." Keep in mind, there is the chance your account can lose value, which would affect your goal.

Build a broadly diversified portfolio

No matter what kind of account or accounts you use to invest in, experts say it's essential that you build a broadly diversified portfolio. The thinking here is simple and based on a long track record when it comes to markets: Different types of investments perform better than others at different times.

By holding a variety of investments, you decrease the likelihood that your portfolio craters in value due to a downturn in any one particular investment or asset class.

If you're just starting out, plenty of investing options offer broad diversification, Zigo notes: "One nice thing about most 401(k) plans is that they make it simple to get a diversified portfolio, since most offer target-date funds." These funds hold a broad mix of stocks and bonds that grows more conservative (i.e., more tilted toward less-volatile bonds) as the investor approaches the age at which they plan to retire.

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For investors looking for an inexpensive DIY approach, index funds and ETFs offer an easy way to diversify, adds Sobolewski. "If it's your first portfolio, you can buy one or two mutual funds or ETFs that give you exposure to, for instance, almost the entire stock market," he says.

If, once you've established a diversified base, you want to venture into owning individual stocks, be aware of the possibility that things can go wrong, Zigo notes. "You can put everything into an individual company, and that firm can go bankrupt," she says. "If you owned that company as part of the S&P 500, it would only be a small percentage of your portfolio."

No level of diversification or asset allocation can ensure profits or guarantee against losses. The views expressed are generalized and may not be appropriate for all investors. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment.

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