The Independent Market Observer

Don’t Be Fooled by These 3 Investing Myths

Posted by Brad McMillan, CFA®, CFP®

Find me on:

This entry was posted on Apr 1, 2015 1:34:00 PM

and tagged Investing

Leave a comment

investing mythsI’m giving a talk today at the Commonwealth Business Experience conference, which, as usual, has been just wonderful. But as I woke up this morning, to go over my presentation one more time, I realized that it’s April Fools’ day.

Not, perhaps, the best day to give a presentation, but it does give me a certain amount of wiggle room for anything I might get wrong . . .

Traditionally, the day has been celebrated by playing tricks and practical jokes on unsuspecting people. With a six-year-old at home, I’m not entirely sad to be traveling today, but April Fools' did get me thinking about certain tricky investing myths we might fall for. Here are a few:

You can invest on your own.

This isn’t a lie—you certainly can—but it’s far from easy. According to hundreds of ads out there, investing is no more complicated than a video game. The fact is, it requires analysis, thoughtfulness, and an appreciation for time horizons, all of which are antithetical to video games. Even if we run with the game analogy, in investing, you’re not going up against your friends but against the whole world. Would you really want to play Call of Duty all day against the best gamers in the world with your savings on the line?

Stocks go up if you wait long enough.

Again, this isn’t a lie, but it is misleading. The returns you should expect vary depending on when you buy. What matters is not whether your investments increase in value, but by how much and over what time period. Diversification can help you ride out the periods when stocks don’t go up, or don’t go up enough. But assuming that the stock market will bail you out, because it always goes up, can result in a big April Fools’ surprise years later.

Investing will enable you to meet your financial needs.

This point is closely related to the last one. Investing is necessary but not sufficient. You also need to save. For investors who start late, save little, and expect double-digit gains to bail them out, all that can help them is luck. Save early, save often, and, yes, invest the money—but you have to do the first two before you get to the third.

“It’s not what you don’t know that kills you; it’s what you know that isn’t so.”

April Fools’ jokes often play on our assumptions of what is reasonable, what we expect to be true, and what we want to be true—and then turn all of those assumptions around. The myths I mention here play off of ideas we want to be true but aren’t.

I could add many items to this list, but just remember this: When you hear something that you really think should be true, consider what might happen if it isn’t—and then go and check.

Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.

                        Subscribe to the Independent Market Observer            

Subscribe via Email

Crash-Test Investing

Hot Topics



New Call-to-action

Conversations

Archives

see all

Subscribe


Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly in an index.

The MSCI EAFE (Europe, Australia, Far East) Index is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.

One basis point (bp) is equal to 1/100th of 1 percent, or 0.01 percent.

The VIX (CBOE Volatility Index) measures the market’s expectation of 30-day volatility across a wide range of S&P 500 options.

The forward price-to-earnings (P/E) ratio divides the current share price of the index by its estimated future earnings.

Third-party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided on these websites. Information on such sites, including third-party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®