5 common investment choices killing your returns

Historically, investing has proven to be one of the best ways to grow your wealth over time. This is particularly true when speaking about the stock market.

Take the S&P 500 index, which has seen an average annualized return of around 10% since its inception in 1928. If you invested $10,000 in the S&P 500 in May 2014, for example, you’d have about $32,000 today if you reinvested dividends (not too bad!)

Investing can be lucrative, not to mention exciting. However, there are some common investing pitfalls that can seriously erode your wealth if you’re not careful. Here are five of the most common mistakes that could be killing your returns.

Timing the market

Timing the market consistently is incredibly difficult, even for the investing experts. During volatile and uncertain periods, you may choose to temporarily move your money to the sidelines. However, you could miss some of the market's biggest gains this way. Instead of trying to time the market, staying invested and using a strategy like dollar-cost-averaging is likely to give you greater returns in the long-term.

Jumping the bandwagon amid speculative stock mania

Most people make stock picks based on a suggestion from their family or friends, follow trends from chatter in the media, or simply invest in a big brand they’re already familiar with. However, the reality is that if you’re trying to invest in just a few volatile stocks in hopes of turning a huge profit, odds are you'll probably lose it all. During the “meme stock” craze in 2021, shares of companies like GameStop (GME) and AMC Entertainment (AMC) surged to all-time highs due to social media hype and many suffered huge losses when the bubble burst.

Emotional investing

Investing is often driven by emotions. It's hard to ignore the headlines and stop checking your account obsessively, but it's critical to focus on long-term returns and goals while investing. Investing on human impulse and feelings leads to less than optimal results. As long as your portfolio is well diversified and you're not trying to time the market, you don't have to fear volatility.

Not reinvesting dividends

When a stock or fund that you own consistently pays you dividends, whether monthly, quarterly, or annually, it’s important to reinvest that cash to purchase more shares of the company. This way, you’ll be compounding your future returns. In most brokerage accounts, there’s an option to do just that automatically called dividend reinvestment plans (DRIPs).The benefits of DRIPs are that there are no commissions or brokerage fees, you can sometimes get discounted prices that accrue in the form of fractional shares, and you’d be compounding your wealth exponentially.

Not investing in index funds and forgetting to diversify

Investing in index funds is crucial for diversified market exposure. Low-cost, index funds, such as iShares Core S&P 500 ETF (IVV) and Vanguard Total Stock Market Index Fund Admiral Shares (VTSAX), are a relatively safer way for you to grow wealth in the stock market and are even recommended by billionaire Warren Buffett. The beauty of index funds is that they typically charge a very low fee, some less than 0.1%. Investment diversification via index funds can mitigate risks during periods of market fluctuation and economic downturns.

Remember that experts recommend not having any single stock account for more than 5% of your potfolio. Make sure your portfolio is always diversified and rebalanced at intervals.

If you’re just getting started with investing, don’t let your emotions (or lack of experience) get the best of you. It’s important to always remember that investing comes with risk. But with knowledge, you can reduce your risk and increase your chances of a significant return. Consider these five tips and tricks to put yourself on the right track for long-term financial success.