Suze Orman is tired of seeing millennials buy and sell stocks based on what’s trendy or which companies are having a moment in the spotlight.
“The biggest mistake I think young people make when investing is that” they buy and sell because they decide, “‘This company is great, I’m going to invest in that,'” the personal finance expert and bestselling author of “Women and Money” tells CNBC Make It. If you try that strategy, “maybe you’ll hit it right, maybe you’ll hit it wrong.”
Instead of picking individual stocks, Orman recommends investing a set amount each month into low-risk options such as index funds and ETFs.
Index funds are a smart way for beginners to get into the market because they’re both inexpensive and diversified. You can think of an index fund as a basket of stocks with hundreds or thousands of different ones inside, explains Nick Holeman, a certified financial planner at Betterment. The S&P 500, for example, is a fund that holds stocks for the 500 largest companies in the U.S., including Apple, Google, Exxon and Johnson & Johnson.
Index funds also historically earn a steady rate of return, as opposed to individual stocks, which are far more unpredictable. That’s because the rate of return for each index fund is determined by the performance of the companies that are in it, which can balance each other out. Say you buy an index that contains only two companies, and one goes up by 3 percent but the other goes down by 2 percent. In that case, you’re still up by 1 percent overall.