7 Investing Myths That Silently Cost You Money
Investing always carries a certain amount of risk, but many investment risks are avoidable, from misinformation, relying on outdated advice or believing myths based on fear.
You don’t need complicated strategies or high-priced consultants to set yourself up for success. Keeping it simple is the best way to keep your retirement savings goal on track, so don’t let common misconceptions about investing cloud your investment plan. Here are seven examples of myths that can lead you astray, and what you should do instead.
Myth 1: You have to time the market
It is an old adage to invest in timing the market rather than timing the market. And it’s true: Staying invested for the long term is the path to success. Market upside and the ability to compound interest will help your money grow over time.
Practicing dollar-for-dollar costing by automatically making contributions to your 401(k) helps speed up the transition and keep you on track.
Myth 2: Greater risk always equals greater reward
Going all in on one stock or sector — say, technology stocks — increases your concentration risk.
Low-cost investments, such as passively managed index funds, give you broad market exposure, protecting you if one company or sector goes down. Small investments allow you to keep more of your income and build wealth faster.
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Myth 3: You should sell when the market goes down
Panic selling when stocks fall is a mistake because it is key to your losses. History has shown that big stock gains come after big routs.
If you’re feeling worried about the foundation of your portfolio, tap into your emergency fund instead. Experts advise three to six months of living expenses if you are employed, and at least double that for retirees.
Myth 4: Past performance predicts the future
Past performance is not an indication of future results. This ubiquitous statement in investing can be easy to overlook, but it’s important to remember.
Historical returns of a mutual fund, exchange-traded fund (ETF) or other investment are retrospective data. In a volatile, forward-looking market, consider cost and diversification instead. A forward-looking approach to fees and underlying securities held by the funds can better guide your investment choices.
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Myth 5: You should stick to home stocks
The US has the largest economy in the world – but you shouldn’t forget the rest of the world when it comes to investing.
Emerging economies, although volatile, have much faster growth rates, and global exposure is a good hedge against domestic economic downturns. Allocating around 20-30% of your portfolio to international and emerging markets or ETFs can allow you to take advantage without taking too much risk. A broad-based index favors balance sheet growth and risk reduction.
Myth 6: Only stocks beat inflation
Investors looking for a diversified portfolio with inflation protection have many options besides stocks. Treasury Inflation-Protected Securities (TIPS), which are specifically designed to adjust for inflation, and assets such as real estate – including precious metals such as gold – tend to rise in value when inflation rises.
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Myth 7: You need a sophisticated portfolio
Although investing can be difficult, it doesn’t have to be. And for most of us, it shouldn’t be. Derivatives such as options and futures can be useful for sophisticated investors, but the additional leverage required makes them more risky.
With a simple, three-fund portfolio that includes US stocks, international stocks and bonds, you can get returns on par with — or better than — more complex instruments.
