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Thanks to Wealthfront for sponsoring today’s video! Open up a Wealthfront investment account today through my link and get your first $5,000 managed for free: https://invest.wealthfront.com/tfd

In this episode, Chelsea talks about common investing strategies people think will work, and why they won’t for most of us.

This video is sponsored by Wealthfront. Open up a Wealthfront investment account today through my link and get your first $5,000 managed for free: http://invest.wealthfront.com/tfd

JP Morgan guide to retirement: https://www.fool.com/investing/2020/12/31/missing-just-a-few-of-the-best-stock-market-days-c/

TFD investing advice: https://thefinancialdiet.com/5-questions-for-an-investment-expert-answered/
https://www.youtube.com/watch?v=W1qNycROEw4&

Liquidity: https://www.investopedia.com/terms/l/liquidity.asp

Amanda Holden GameStop explanation: https://www.instagram.com/tv/CKpfzndD1M3/

Stock performance study: https://mebfaber.com/2008/12/02/the-capitalism-distribution-fat-tails-in-action/

Warren Buffet advice: https://www.thebalance.com/pick-stocks-like-warren-buffett-4118944

Diversification: https://www.investopedia.com/terms/d/diversification.asp

401k match: https://www.investopedia.com/articles/personal-finance/120315/what-good-401k-match.asp

401k contribution amount: https://smartasset.com/retirement/how-much-should-you-contribute-to-your-401k#:~:text=Most%20retirement%20experts%20recommend%20you,contribute%20a%20maximum%20of%20%2419%2C500.

Stanford study: http://longevity.stanford.edu/sightlines-financial-security-special-report-mobile/

What to do after maxing out 401k: https://www.investopedia.com/articles/personal-finance/070615/i-maxed-out-my-401k-now-what.asp

Wealthfront Advisers LLC (“Wealthfront Advisers”) and The Financial Diet have an agreement in place to promote Wealthfront products and services. There is no formal relationship with The Financial Diet aside from this agreement and Wealthfront Advisers only sponsors content that relates directly to Wealthfront. Any links provided by The Financial Diet are not intended to imply that Wealthfront Advisers or its affiliates endorses, sponsors, promotes and/or is affiliated with the owners of or participants in those sites, or endorses any information contained on those sites, unless expressly stated otherwise. Investment advisory services are provided by Wealthfront Advisers, an SEC-registered investment adviser, and brokerage products and services are provided by Wealthfront Brokerage LLC, Member FINRA/SIPC. Nothing in this communication should be construed as tax advice, an offer, recommendation, or solicitation to buy or sell any security. All investing involves risk, including the possible loss of money you invest, and past performance does not guarantee future performance.

Watch more of The Financial Diet hosted by Chelsea Fagan here: https://www.youtube.com/playlist?list=PLD30V46E07RR99cC0gCjKUbt-BKoDUcnc

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Hey, guys. The less that regular consumers know about how money actually works in our society the easier it is to profit off of them. Thankfully, though now investing is more accessible than ever and more affordable than ever. But this does also mean that you'll hear a lot of competing advice about the right way to invest. Today we're going to talk about some investing strategies that sound like a good idea, but probably aren't. And what you can do instead.

Number one is making investment decisions based on scary market news. Last spring people were freaking out about the drops that they were seeing in the market and wondering if that meant they should pull out of things like their 401 ks or other investment accounts. And when that happens it's totally understandable to feel anxious about it. This is your money and in many cases, your nest egg that you're talking about. And when you can log into your various portals and see that your net worth has dropped by huge amounts in such a short period of time, the impetus to want to react is totally human. But what you absolutely should not do at any cost is to react to scary market news or dips in the market by taking your money out of the market. The most important thing to keep in mind about a strong sustainable investment strategy is that it is for the long term. And these short term fluctuations really don't matter. And more importantly missing just a few of the top performing days in the stock market could end up costing you enormously over your entire investment window. According to JP Morgan's guide to retirement report if you invested $10,000 into the S&P 500 on January 3, 2000 and left it completely invested until December 31, 2019, you would have received an average annual return of just over 6%. Your $10,000 would have grown to $32,421. This 20 year period of time includes roughly 5,000 days during which the stock market was open. But if you had missed just the 10 best days out of those 5,000, you would have less than half as much money. Miss the best 20 days and you'd barely have made any money at all over 20 years, and you'd have lost money if you missed any more winning days. Thanks to the magic of compound interest. The longer your money stays in the market, the longer it has to grow. And those various fluctuations that might happen on a given day on the long road to growing your investment should not at all to save for shorter term purchases one of the biggest rules of thumb when it comes to investing is to not invest any money that you can't afford to lose in the short term. As we said earlier keeping your money invested in the long term is crucial to building real wealth and capitalizing on the larger trends of the market. But in the short term nothing is guaranteed.

Here at TFD for example, we believe in that golden rule of keeping three to six months is worth of living expenses in your emergency fund which should always be liquid, meaning accessible at any moment. That's in places like your average, high yield savings account for example. Liquidity just really refers to how accessible any given asset is in terms of its ability to be converted into cash without affecting its value. Obviously, cash being the most liquid because it's already cash. Something like a home you may not be able to sell it at the right price or something like investments you may have to take out at a low point in the market. And it can be tempting when we're saving for something that's like medium far away for example, if you're looking to buy a home in the next few years and want to build up a quick down payment to try and capitalize on the increased returns of investing in the stock market versus something like a high yield savings account. But the truth is that you could be pulling that money out of the market because of your needs. When it comes to home buying at a time when the money is way lower in value than it otherwise would be. If you happen to need the money when the market is at a dip, you are now obligated to do what we talked about in the first point, which is taking your money out at a bad time and doing what we refer to as locking in your losses. Those returns are tempting but they only work on a long time scale.

Number four is buying a lot of stock in one company. A lot of people still have the misconception that investing primarily refers to buying stock in a given specific company and using things like market news to help influence those decisions. But the truth is that market news can often be counterintuitive. For example, hearing that a certain stock is up might make you think, Oh, I should go buy that when really you might just be getting at a higher price than you otherwise would have to. Individual stock picking in some cases has worked for people and can theoretically work. But for the average retail investor it is incredibly difficult to game your investment choices in a way that is going to outperform the market. If it were easy to do a lot more people would be doing it. And even professionals have a very difficult time consistently producing better returns than market average. And this is especially true if you're making a bulk of your investment decisions based on the big flashy news items, which brings us to that whole GameStop debacle. TFD resident investing expert Amanda Holden did a great explainer video about this on our Instagram, which will link you to in the description, but here's a brief explanation. What hedge funds were doing was practicing short selling. Instead of buying GameStop stock they would borrow it the way you can borrow essentially any type of capital. With short selling you only need to return the same number of stocks you borrow no matter what the value is. So hedge funds were borrowing these GameStop stocks selling them and assuming that they would drop in value. So that they could buy the stocks back and then return them to the lender. They predicted that because GameStop as a company is becoming more and more obsolete the price of the stock was going to fall dramatically. However, this risk did not pay off. Redditors collectively came together to throw a bunch of money at the GameStop stock to drive the stock price higher and mess with those hedge fund brose. Now the hedge funds were in a place where they had to buy back extremely expensive stocks to the tune of millions of dollars, which they then needed to return to the bank. But the take away of this is not to do with the redditors did or to practice short selling like the hedge funds. Though some of them were able to profit, the majority were not and will not. Any stock that has an absurdly fast increase in value is likely going to have an equal and opposite come down and speculating or making decisions on short term greed is not the right way to build long term wealth. And this applies to buying any individual stock not just the ones you hear doing well in the news. In fact, one study found that only about one in three stocks performs better than the average. And even Warren Buffet, one of the most successful investors of all time, suggests funneling stock investments into an S&P 500 index fund, which is a type of mutual fund that follows the performance of 500 of the largest public companies in America rather than picking individual stocks. Heavily investing in individual stocks that you're trying to game and understand in order to edge out the market is not diversifying your portfolio and is opening you up to huge risks. We'll link you guys to a video in the description that explains all about these concepts and how to set up your portfolio to be diverse and healthy.

Number 5 is only contributing to your 401k up to your employer's matching limit. If your employer offers a 401k and offers to match it up to a certain point, you're already in a great place when it comes to saving for retirement. Employer matching basically means that your employer will contribute a certain matching amount to your retirement savings based on what you yourself are saving from your paycheck. This is often a perk that comes at companies a little bit later into your tenure often to incentivize longer term loyalty from employees. About 56% of companies that offer the match give it to employees when they start. Another 24% requires that they have one year of service before it begins. But if your employer offers it, it is essentially a free money benefit of your job. However, with the federal limit on 401k contributions each year being $19,500, it is likely that your employer is not going to match all the way up to that limit. About 71% of companies of matching contributions contribute 50 cents for every dollar employees contribute up to 6% of their pay. Another 21% match employee contributions dollar for dollar, but the maximum is normally lower, commonly about 3%. So say that your employer offers a standard 6% match of 50 cents for every dollar you contribute and your salary is $60,000. 6% of your salary would be $3,600. So if you contribute that much your employer would match at $1,800 making your total contribution $5,400. But that still keeps you well under the contribution limit of up to $19,500, especially when you consider that your employer contributions do not count toward your 401k contribution limit. You don't have to max out your 401k, especially if you can't afford it, but do remember that the money you invest earliest in your life is going to have the biggest chance for growth. Most experts say to put at least 10% to 15% of your pre-tax income toward your retirement funds. So if your salary is 60,000 that would be saving 6,000 to 9,000 towards retirement.

Lastly, number six is limiting your retirement to what your employer provides. On the other hand you should not limit yourself to feeling that whatever retirement program your company offers to you is where you should stop your retirement savings, especially obviously if your employer doesn't even offer a 401k. A report from the Stanford Center of Longevity found that just about half of American households are offered workplace retirement benefits through their current employers. Now there are many practical issues with tying retirement plans to employers, which I frankly don't even have the time to get into right now. But one of the problems is that the contribution limits are often much higher in employer offered accounts such as 401k than an individual retirement accounts, such as traditional and Roth IRAs. The current annual contribution limit for a 401k is $19,500. For a Roth or traditional IRA or individual retirement account, it is $6,000. The catch is that while essentially anyone can open an IRA the type depending on your income as Roth IRAs have an income limit, you can only open a 401k if your employer offers it as a benefit. However, if your employer does not offer a 401k that does not mean you can opt out of finding your own strategy to retirement savings and doing it as soon as possible to maximize the benefits of staying in the market longer and enjoying that sweet, sweet compound interest. Additionally, even if you do have a 401k and are maxing out you don't need to stop there. Now this is likely advice for when you're furthering your career and earning more but you can open a tax advantaged IRA in addition to your 401k. And if you are maxing out your 401k but it's still not meeting that 10% to 15% of your income rule, you need to look into more vehicles for placing that money for retirement. Will link in the description to an article all about what And as always, thank you for watching and do not forget hit this Subscribe button, as well as to come back every Monday, Tuesday and Thursday for new and awesome videos. Goodbye.