7 pieces of investing advice that sound smart but could hurt your wallet

You’ve heard them at dinner parties, seen them on social media and maybe even caught yourself repeating them. Those nuggets of investing “wisdom” that sound so logical, but are completely wrong.

The problem with bad investing advice isn’t that it sounds terrible. It’s that it sounds smart and reasonable on paper. These rules of thumb get passed down at water coolers and family gatherings, spreading through social media feeds and finance forums. However, they can damage your future wealth and retirement savings.

Let’s tear apart seven pieces of conventional investing wisdom that you should ignore.

1. “You need $1 million to retire”

You’ll find this simple number everywhere — financial blogs, retirement calculators, even casual conversations about the future. Hit seven figures, and you’re set for life, right? Not so fast.

We asked an expert: Is $1 million really enough for retirement?

Why this advice falls flat

Lawrence Sprung, certified financial planner (CFP) and founder of Mitlin Financial in Hauppauge, New York, explains that “there was a time when having a million dollars would set one up for success, but today, this may or may not be true. In certain areas of the country, this still may be sufficient, but in others it will not.”

A million dollars in San Francisco barely covers a modest retirement, while the same amount funds a comfortable lifestyle for years in rural Arkansas. Your ZIP code matters as much as your savings balance when determining retirement readiness.

This reality check applies whether you’re trying to retire with $500,000, $1 million, or any other number. The key question is whether your savings can support your actual lifestyle in your chosen location.

If you follow the 4% withdrawal rule (more on why that’s problematic later), $1 million gives you $40,000 annually before taxes. The latest data shows median household income reached $80,610 in 2023, meaning that this $1 million retirement number provides half of what the typical American family lives on today.

What to do instead

Instead of chasing a round number, build a plan based on your lifestyle and goals. Map out when you want to retire, where you’ll live and what kind of life you want to lead — travel-heavy, modest or something in between. Then, use the help of a financial planner or retirement calculators to estimate how long your savings need to last and what income streams you’ll draw from. This approach grounds your strategy in personal realities, not abstract benchmarks.

Learn more: How to find a trusted retirement advisor

2. “Buy low, sell high”

No investment advice sounds smart yet proves more useless in practice than this one. It’s like telling someone to “be happy” when they’re depressed. That’s the goal, but how exactly?

Chad Rixse, chartered retirement plans specialist (CRPS) and partner at Forefront Wealth Partners in Austin, Texas, sees this play out constantly. “This oversimplification is a surefire way to miss out on significant opportunities for gain. Trying to time the market will most likely lead to analysis paralysis, keeping you on the sidelines while opportunities pass you by.”

“Nobody rings a bell at the top or bottom of the market. Even professionals with research teams and algorithms get this wrong,” says Julie Bray, CFP and president at GW Financial, a family wealth management firm in Orange County, California. “Retail investors trying to time dips usually end up buying too soon and panic-selling too late.”

Instead, Bray recommends building a diversified portfolio, automating your contributions and rebalancing periodically. “It’s not attractive,” she adds, “but neither is retiring broke.”

Why it’s a trap

Study after study from Morningstar, a leading investment research firm, shows that even professional fund managers struggle to time the market consistently. The average investor underperforms the market by 1.1% annually, largely due to poor timing decisions.

Missing just the 10 best trading days over 20 years can cut your returns in half. Plus, the best days often come right after the worst ones, when fears of bear markets or recessions keep many investors on the sidelines.

What actually works

Dollar-cost averaging beats timing attempts almost every time. Invest the same amount regularly, regardless of market conditions. When prices drop, your fixed amount buys more shares. When they rise, you buy fewer. Over time, you average out the volatility without the stress of guessing.

Learn more: Dollar-cost averaging: How to stop worrying about the market and enjoy automatic investing

3. “Invest in what you know”

Peter Lynch popularized this advice, and it’s been misunderstood ever since. Sure, Lynch made a fortune at the Fidelity Magellan Fund. But he wasn’t buying stocks just because he recognized the name from the mall. He was diving deep into balance sheets, company performance and market data. The “buy what you know” mantra wasn’t about gut instinct — it was about doing the homework after something caught your attention, not instead of it.

Christopher Jackson, CFP at CPJ Financial in Austin, Texas, offers a sobering reality check. “You may love your Allbirds sneakers and ride your Peloton bike every day, but don’t ask anyone who bought these stocks at the highs how they feel about the companies.”

Here’s what your shares would be worth today if you had invested $1,000 in Peloton or Allbirds at their peak prices:

Why familiarity isn’t the best investment strategy

Loving a product doesn’t mean understanding the business. Peloton users didn’t see the post-pandemic demand cliff coming. Your emotional connection to brands clouds rational analysis. Tesla fans might rave about their Model 3, but that doesn’t mean they’ve read the quarterly margins or understand the risks of global EV competition.

The smarter approach

If you plan to invest in individual stocks, Jackson suggests focusing on fundamentals. He recommends “looking at the company’s business model and how it actually generates revenue and turns a profit.”

“From there, you should evaluate its financial health. Is it making money or burning through cash, and how much debt is it carrying?” he adds. “You also need to consider the valuation — are you paying a fair price, or has hype pushed the stock far beyond it’s fundamentals? Finally, ask yourself if the business is built on a durable trend or just riding a short-term fad.”

If analyzing individual stocks sounds overwhelming, stick to low-cost index funds. You’ll own pieces of hundreds of companies without needing to predict which ones will survive.

Learn more: What are mutual funds? And how to use them to access professional portfolio management

4. “Just max out your 401(k)”

This sacred retirement advice gets repeated so often, questioning it feels like financial heresy. But maxing out your 401(k) without strategy can create serious problems.

We asked an expert: Why is maxing out your 401(k) not always smart?

When maxing out makes sense

If your employer matches contributions, always take advantage of this benefit by contributing as much as you need to get it in full. Beyond that, balance is key. Gordon recommends layering in Roth IRAs and taxable accounts for flexibility.

For example, a 40-year-old planning to retire at 55 needs accessible funds for the gap years before 401(k) withdrawals become penalty-free. Locking everything into retirement accounts creates a cash crunch when you need liquidity.

Learn more: 401(k) withdrawal rules: What to know before cashing out — and how to avoid penalties

5. “The 4% rule is your retirement roadmap”

This financial advice is a simple one. Withdraw 4% of your portfolio annually, adjust for inflation and never run out of money. Simple, clean and dangerously outdated.

Alex Koynoff, financial advisor and founder of ATK Financial Prosperity in Los Angeles, California, explains that “life is not linear like in a spreadsheet. An emergency, a health event or a prolonged bad stock market period are all examples that can ruin the idea of the 4% rule.”

Why the 4% rule fails in real life

• Unpredictable inflation. The rule assumes steady inflation. Recent years have shown how quickly rising prices can outpace expectations.

• Impact of bad timing. Retiring into a bear market while withdrawing 4% can damage your investment portfolio before it gets a chance to recover.

• Rigid approach. Most retirees adjust spending based on market conditions, not spreadsheet formulas.

Koynoff also points out another critical oversight. Assuming that the average inflation is 3%, then “about every 25 years, the dollar loses half its purchasing power,” he says. “If you estimate that you need to get to $1 million to become financially independent according to the 4% rule, and it takes you 25 years to get there, you’ll have the purchasing power of less than $500,000 by that time.”

A flexible approach

Plan for a dynamic retirement withdrawal strategy. Spend more in good years, tighten the belt during downturns. Build multiple income streams, such as Social Security benefits, part-time work and taxable investment accounts, to reduce dependency on your retirement portfolio.

Learn more: Worried about outliving your savings? 5 retirement withdrawal steps to make your money last longer

6. “Dividend stocks give you free income”

This myth attracts retirees seeking steady income streams. Buy dividend-paying stocks, collect quarterly payments, and preserve your principal. What could go wrong?

The reality is more complex. Evan Luongo, CFP and founder of NoDa Wealth Management in Charlotte, North Carolina, explains that “too many investors fall into the trap of thinking dividends are free money. They are not. A $2 dividend doesn’t magically appear – it reduces the share price by $2.”

How dividends actually work

• The company trades at $100 per share

• The company pays a $2 dividend

• Share price adjusts to $98

• You receive $2 cash plus $98 in stock value for a total of $100

This transaction simply moves money from one account to another while creating a taxable event in the process.

“The bigger issue is that dividends are not guaranteed,” Luongo warns. “Companies can cut or eliminate them at any time.” Just ask anyone who owned bank stocks in 2008 or energy companies in 2020. Those “reliable” dividends vanished overnight, along with share prices.

Better income strategies

Focus on total return, not chasing yields. A growth stock that appreciates 8% beats a 4% dividend stock that stays flat. When you need income, sell shares in a controlled, tax-efficient manner by benefiting from long-term capital gains taxes instead of hoping companies maintain their payouts.

Dividend stocks can still play a valuable role in a well-rounded portfolio. They can provide steady income and tend to come from established companies with steady business models. The key lies in diversification — don’t build your entire retirement strategy around a single type of asset.

Learn more: Best low-risk investments for retirees: Steady returns to protect your nest egg

7. “Cash is king” or “you haven’t lost until you sell”

These opposite extremes both lead to poor outcomes. Cash savers miss decades of potential growth. The “diamond hands” investors — those who refuse to sell no matter what — may hold onto winning stocks for too long and watch their gains evaporate when markets turn south.

Arielle Tucker, CFP and founder of Connected Financial Planning, an advisory specializing in cross-border planning for U.S. citizens living in Europe, points out that “holding too much cash feels safe, but it guarantees you’re losing purchasing power over time, especially when inflation is high.”

The “diamond hands” investors have their own problems. Brennan Decima, CFP and owner of Decima Wealth Consulting in St. Petersburg, Florida, explains that “you don’t have to take the same cab home that you took to dinner. Hop on the ride that gets you where you need to be. Holding the best companies to recover a loss is a better strategy than refusing to accept the initial decision was a poor one.”

Why both extremes fail

Cash lovers point to market crashes as vindication. But $10,000 in cash since 2009 is still $10,000 — though inflation has reduced its purchasing power to roughly $6,600. The same amount invested in a simple S&P 500 index fund is worth over $55,000 today, even after inflation adjustment and multiple periods of volatility.

Meanwhile, investors who refuse to sell losing assets may avoid solidifying their loss by watching a 20% loss turn into 50% or 80% declines. This approach occasionally works when truly great companies recover, but more often it destroys wealth since it can keep you from cutting losses and reinvesting your money into better opportunities.

The balanced strategy

Keep six to 12 months of expenses in high-yield savings for emergencies. Invest the rest based on your timeline. And yes, sometimes selling makes sense — for rebalancing, tax losses or when your reasons for owning a stock no longer apply.

Good investing isn’t about following catchy rules or timing the perfect trade. It’s about understanding your unique situation, maintaining discipline and avoiding the behavioral traps that derail most investors. Skip the fortune cookie wisdom and focus on what actually works: diversification, low costs, and the patience to let compound interest do its thing.

Learn more: Is saving or investing a better strategy for growing and protecting your wealth?

Where to find reliable investment guidance

Getting trustworthy investment advice is actually easier than you might think. Several established resources offer solid guidance without the sales pitches or conflicts of interest.

• Start with fiduciary financial advisors. Fee-only fiduciary advisors charge flat fees or a percentage of assets they manage without accepting commissions for recommending specific products or investments. Being fiduciary means that they’re legally required to put your interests above their own. Look for the CFP designation, which requires ongoing education and adherence to strict ethical standards.

• Check regulatory directories. The Financial Industry Regulatory Authority (FINRA) maintains a database of registered advisors that you can access through the BrokerCheck tool. The tool lets you research an advisor’s background and look for red flags like disciplinary actions.

• Consider low-cost robo-advisors. Robo-advisors typically charge 0% to 0.25% annually, compared to 1% to 1.50% for traditional advisors. Platforms like SoFi Invest, Acorns and Wealthfront offer automated portfolio management that works well for most people with relatively simple financial situations.

• Use employer resources. Many employers offer financial planning consultations as part of employee benefits, sometimes providing access to financial advisors through your 401(k) provider. These services are often free or low-cost and can provide objective guidance without sales pressure.

How to spot bad investing advice

Bad investing advice can sound pretty convincing, which is exactly what makes it so dangerous. But once you know what to look for, these red flags become easier to spot and can save you from some expensive mistakes.

• Watch for oversimplified solutions. Any advice that boils complex financial decisions down to a single rule should make you suspicious. “Always put 10% in gold” or “never invest during election years” ignores your unique situation, timeline and goals. Good advice takes into account your circumstances before offering solutions.

• Be skeptical of guaranteed returns. Nobody can promise specific investment returns, especially high ones. When someone guarantees you’ll double your money or beat the market consistently, they’re either lying or setting you up for disappointment. Real investing involves uncertainty, and honest advisors acknowledge this.

• Run from pressure tactics. Good advice doesn’t come with artificial deadlines or high-pressure sales pitches. Phrases like “act now,” “limited time offer” or “this opportunity won’t last” are red flags. Quality investment opportunities don’t disappear overnight, and good advisors want you to think carefully before committing your money.

• Look out for cherry-picked success stories. Be wary of advice that only highlights the best-case scenarios while ignoring the failures. When someone brags about their Amazon stock pick from 2010 but doesn’t mention the five other “sure things” that lost money, you should be suspicious. Good advisors discuss both wins and losses and explain how their overall strategy performed, not just the home runs.

Learn more: 5 red flags to watch out for before choosing a financial advisor

More stories in our investing series

FAQs: Investing guidance and your wealth

Find out more about how investing guidance can influence your future wealth. And take a look at our growing library of personal finance guides that can help you save money, earn money and grow your wealth.

How much should I pay for investment advice?

Fee-only financial advisors typically charge 0.75% to 1.25% of assets under management annually, or more if they’re providing additional services like tax planning or estate planning, while robo-advisors cost 0% to 0.25% per year. For simple portfolios, low-cost mutual funds or exchange-traded funds (ETFs) often provide great value. Learn more about investing fees and how to minimize them.

How often should I check my investment accounts?

Monthly or quarterly reviews are plenty for most long-term investors. Checking daily or weekly often leads to emotional decisions based on short-term market noise rather than your actual financial goals. Set up automatic contributions, rebalance once a year or when your mix of investments gets too far off from what you planned, and resist the urge to constantly check how you’re doing. Your time is better spent on earning more income or improving your financial habits.

What should I do if I made a bad investment?

Don’t panic-sell. First, figure out whether it’s truly a bad investment or just temporary market ups and downs. If the company’s business, financial health or competitive standing has gotten worse, or you realize you didn’t understand what you bought, consider slowly selling some of your shares rather than dumping everything at once. If your bad investment is large or you’d like help with the process, get in touch with a financial advisor who can guide you. And remember that even the best professional investors make mistakes.

Editorial disclaimer: Information on this page is for educational purposes and not investment advice or a recommendation to buy any specific asset or adopt any particular investment strategy. Independently research products and strategies before making any investment decision.

Sources

About the writer

Yahia Barakah is a personal finance writer at AOL with over a decade of experience in finance and investing. As a certified educator in personal finance (CEPF), he combines his economics expertise with a passion for financial literacy to simplify complex retirement, banking and credit topics. He loves empowering people to make informed financial decisions that improve their everyday and long-term wellness. Yahia’s expertise has been featured on FinanceBuzz, FX Empire and EarnForex. Based in Florida, he balances his love for finance with freediving, hiking and underwater photography.

Article edited by Kelly Suzan Waggoner

📩 Have thoughts or comments about this story — or ideas on topics you’d like us to cover? Reach out to our team.