Investing isn't always a simple process.
What's appropriate for one investor may not be right for another, and it might feel like there are a hundred rules to follow even when it comes to the basic concepts that apply to most individuals.
You've probably internalized some of them like: buy low and sell high; keep your expenses to a minimum, or don't put all of your eggs in the same basket.
We are constantly inundated with information and opinions that shape the way we feel about our money — and, importantly, how we use it. From business news sites to personal finance blogs and social media, there are many investing myths.
However, parroting the beliefs of mainstream financial media does you no good as you’re bound to make the same mistakes as the majority. For example, the present rout in the bond and equity market has yet again raised doubts about the efficacy of 60-40 portfolio allocation in present times.
Though no one can predict the market's movement with certainty, it’s worth examining your investing habits and figuring out which ones might lead you to miss out on valuable gains or register painful losses.
Let's look at some of the biggest investing myths around.
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On the surface, it’s easy to see how people would relate investing in the market to gambling.
The meme stock trend in 2021 exemplifies how people can invest just for the thrill of it, making them amass (and lose) crazy wealth overnight. Both involve risking capital without knowing for certain if you’ll get a return.
But perhaps the biggest difference between investing and gambling is that over the long run, time is in favor of the investor whereas, with gambling, time would be in favor of the casino.
Investing is a long-term game where the investor most likely benefits from sticking it out over time. It also requires 'science' and 'methodology' as shown through fundamental and technical analyses.
Another cliché that has to be refuted is the "buy cheap, sell high" strategy. Because those parameters are subjective, the concept of "buy low, sell high" is not applicable in all cases.
Instead, it should be 'buy high, sell higher,' because strong companies tend to become stronger over time, and you should purchase stocks in an uptrend no matter how 'high' they are.
Clearly, selling for more than you paid for a stock is critical — and it's simpler when the opening price is lower. But if you believe you should only acquire stocks that have broken down, you'll be losing out on a lot of large possibilities.
Building a diversified portfolio is one of the hallmarks of good investment management. Incorporating a diversified portfolio strategy can help when one investment or asset class drops in value.
A gain in another investment or asset class helps offset the loss. Basically, spreading your bets means that something in your portfolio is always working.
But building a well-diversified portfolio doesn’t necessarily mean buying as many different things as possible. One misconception is that the more funds you are invested in, the more diverse your portfolio is.
Experts usually advise investing in companies of different sizes while aiming for a balance between domestic and international stocks and even between growth and value-oriented names. But ordering a diner menu’s worth of funds won’t necessarily accomplish that goal. In fact, it might have the opposite effect.
If you invest in a slew of different funds, you could end up tying a chunk of your portfolio in the same one or two stocks that are heavily held within those funds.
You can keep things relatively simple by owning a few funds that cover broad swaths of the market. Investing in a total market U.S. stock fund, a total market bond fund, or an international total stock fund puts you in the ballpark for a good portfolio.
Another huge misconception people have is that some investments are safer than others.
While some investments are less jumpy than others, none are risk-free. All investments are subject to potential loss or gain depending on several risk factors such as geopolitics, inflation, monetary policy, state of the economy, etc.
Whether you’re thinking about stocks or bonds or gold or cryptocurrency, investors can bid down the value of any investable asset you own. Stashing cash in a bank account or under your mattress isn’t risk-free either, as a savings account is equally subject to inflation risk.
Understanding your tolerance for the various sorts of risks associated with the assets you may hold and building your portfolio accordingly is an important part of creating a long-term investing strategy.
Younger investors who are saving for a long-term objective, such as retirement, typically have the opportunity to keep riskier investments, such as equities, which have traditionally provided significant long-term returns.
Experts argue that individuals saving for short-term goals should focus on lower-risk vehicles such as savings accounts, even if this means losing some buying power to inflation.
The belief that U.S. stocks perform better than foreign stocks is somewhat true. However, Fidelity noted that U.S. and international stocks outperform each other in cycles. Recently U.S. stocks have performed better, but that role looks like it is going to be reversed given the rising inflation rate and loss of credibility of the Fed to handle it.
U.S. equities are having their worst performance since 2020. The Nasdaq and S&P 500 are already in bear territory, and with more interest hikes on the way, there are mounting fears that U.S. equities would slide further. As such investors may be looking for opportunities in emerging markets.
In the short term, investment fees might not seem like a big deal. However, over the long term, fees are incredibly important over time as they can eat away at your investments.
Fees are one part of investing that investors can control. For example index funds can be purchased for less than 0.1% in annual fees. It is important to factor fees and commissions into investing costs.
Some investors may want to hire an investment manager rather than invest in index funds. However, this does not always imply higher returns over time.
Research has shown that over lengthy periods, investment managers cannot beat a simple, low-cost index fund.
Managers who do well in one period sometimes perform poorly in the next, making it hard to predict a winner in advance. Instead, invest in low-cost index funds and stick with them through good and bad times.