Financial expert Ramit Sethi recently broke down the biggest mistakes investors make that drain wealth instead of building it. In a YouTube video, he explained that most people don’t even realize they’re being taken advantage of until it’s too late.
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“Do you even understand how you are being preyed upon?” Sethi asked. “Think about a deer in the forest: They’re always looking around, on alert because they know they’re in danger. But with investing, people have no idea how they are being taken advantage of.”
Here are the five investment traps Sethi warned against, including one he calls “the hardest to resist.”
Sethi’s first warning targeted investors who think they can control when to buy and sell based on market conditions. The problem is that control backfires spectacularly with investing.
He explained that if you invested $10,000 and kept it in the market for 15 years, you’d end up with about $30,700. But if you missed just the best 30 investing days during that period, you’d only have $6,873. Translation? You’d actually lose money.
“You think you can control when to invest. Is it high? Is it low? Oh, the newspaper says it’s really dangerous, I better pull my money out,” Sethi said. “If you were trying to control your investments and invest when the market was low, and if you were trying to sell when the market was high, you would have likely lost hundreds of thousands of dollars over the course of your lifetime.”
Sethi’s advice? “In investing, you actually want less control.”
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The second trap involves what Sethi called “lifestyle porn,” aka aspirational purchases that look amazing but destroy your wealth.
He shared the story of a couple who were $30,000 in credit card debt but ended up buying a timeshare. They thought they were getting free breakfast during a vacation presentation, but walked away locked into payments for something they’d later regret.
Timeshares, luxury cars, McMansions far from work and expensive home renovations all fall into this category. They sell you the dream without showing the reality of years of payments, maintenance costs and lifestyle compromises.
“Many people buy the dream, but they do not pay attention to the reality,” Sethi explained. The Instagram-worthy yard doesn’t account for the two-hour daily commute. The exotic vacation ignores the payment plan stretching years into the future.
His point: “Falling for lifestyle porn once can cost you for decades.”
Sethi reserved particular criticism for financial advisors who charge a percentage of assets under management (AUM), typically 1% annually.
He walked through the math. If you invest $50,000 and add $1,000 monthly for 35 years, you’d have just over $2 million with a low-cost index fund charging 0.2%. But with a 1% advisor fee, you’d only have $1.7 million.
“That’s more than $380,000 going into your advisors’ pockets in fees and lost returns,” Sethi said.
The 1% fee sounds small but compounds dramatically over decades. Sethi compared it to other services: You wouldn’t pay 1% of something to your gardener or trainer, so why accept it from a financial advisor?
“I would never pay a percentage of assets under management,” he stated flatly. He’s worked with financial advisors himself but only on flat-fee arrangements where he knows exactly what he’s paying.
Anyone promising consistent 20% annual returns is running a scam, according to Sethi. He used Bernie Madoff as the cautionary tale. If you don’t remember, he’s the investor who promised 18% to 20% returns regardless of market conditions and ended up orchestrating a $65 billion Ponzi scheme.
The reality is the market has returned approximately 10% annually on average since 1957, and almost nobody beats that consistently. Studies show that even when fund managers beat the market one year, they typically fail to repeat that performance in following years.
“You can’t beat the market year after year consistently,” Sethi said. “I don’t care that you’re about to talk about Ray Dalio or Renaissance investing. You don’t have access to those.”
When someone in an ill-fitting polo shirt draws complicated diagrams promising exceptional returns, run the other direction. The fundamentals don’t support those claims, and individual investors end up losing money chasing the impossible.
Sethi called this the hardest red flag to resist because everyone around you is talking about whatever’s trending. NFTs, meme stocks, alternative cryptocurrencies — by the time your Uber driver or barber is giving you investment advice, it’s too late.
He pointed to Justin Bieber spending $1.3 million on a Bored Ape NFT in 2022. By mid-2023, the value had collapsed by over 95%. Suddenly all those NFT Twitter avatars disappeared like they never existed.
The problem is survivorship bias. You only hear about the investments that succeeded. The ones that failed get quietly eliminated from fund company prospectuses and memory.
Sethi explained how mutual fund companies manipulate this. They claim 90% of their funds have five-star ratings, but that’s because they eliminate underperforming funds from the count. “They only show you the best performing ones. And therefore by default, they are 95% five-star funds. This is called survivorship bias,” he said.
His frustration was clear: “I don’t mind if some sophisticated Wall Street investor loses their money because you know the risks. I do mind if an everyday person like a school teacher says, you know what, I really want to invest for my family’s future. They don’t understand the games being played around them.”
Instead of these traps, Sethi recommended simple, boring diversification through low-cost index funds. Invest across stocks and bonds, include large-cap, mid-cap and small-cap holdings, add some international exposure and let it sit.
Target date funds make this even easier; they automatically adjust your asset allocation as you age. “You just pick a fund based on your retirement date. And that is it,” Sethi explained.
If you want to have fun with speculative investments, he’s fine with that — just limit it to 5% of your portfolio. But the core of your wealth should be built through proven, time-tested strategies that work over decades, not schemes promising quick riches.
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This article originally appeared on GOBankingRates.com: Ramit Sethi: 5 Investment Traps That Are Complete Wastes of Money
