Money

Suze Orman says this is the No. 1 investing mistake young people make

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.

Orman also suggests using a strategy known as "dollar cost averaging," in which you invest a fixed amount into the stock market on a regular basis instead of buying a lump sum of stock all at once. This technique reduces risk because you're accumulating shares without trying to time the market yourself. It also discourages investors from making decisions based on their emotions.

When share prices are high, you're able to buy less, but when prices drop, you can buy more, and it all levels out in the end. "Over time, your dollars — the cost of those shares — are averaged so that you always come out ahead," Orman says.

Since investing always comes with risks, it's important to do your homework and speak with a trusted financial advisor before adopting any plan yourself.

Both of Orman's pieces of advice point to one simple truth: Don't try to time or outsmart the market. To earn stable returns, consistently contribute to a low-risk fund.

"Do that month in and month out and month in and month out, until you are old and grey," Orman says.

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