Wealth Management

Top 5 Investing Myths and Misconceptions That Can Be Costly

Published by Bob Gustafson

Top 5 Investing Myths and Misconceptions that can be Costly

There are many common investing myths that can be very costly, leading you to be too conservative, too risky or avoid investing completely. We’d like to steer you away from some of the most common investing misconceptions – better known as traps – that can significantly injure your investment power and financial strength.

When we talk to investors, we often ask why they made the investment decisions that they did. What we hear most often is rationale that fits into some of the most pervasive, most damaging assumptions about investing. And, seeing their under-performing funds and allocations, we seek to remedy those missteps with the best investment decisions possible.

Here are our picks for the Top 5 Investing Myths/Mistakes/Traps/Regrettable Decisions:

1. Making investment decisions based on recent returns.

For instance, let’s say you look at what’s working lately, investments that are currently performing well, and think to make your investment decisions based on what you see as a successful trend. That’s a TRAP.

Here’s why: every asset class performs in cycles. What’s working today might tank in a few days, weeks, months or years. It is a mistake to try to time these cycles on your own. The better choice is to diversify, re-balance and stay the course. This will give your portfolio the best opportunity to perform well.

2. Believing that you can time the market.

Some financial media outlets may give you that impression based on what’s working well right now in the market. But this is a TRAP.

Statistics show in heart-thudding reports that no one can consistently time the market. It’s not a game you can play, and trying to do so can significantly damage your investments’ strength. Again, diversify to help you weather any dips and waves in the market.

If you feel compelled to try to time the market, use a very small piece of your portfolio “to play with”. Overtime you will come to realize that timing the market is incredibly difficult if not outright impossible.

3. Believing that international investing is too risky.

This TRAP is a tricky one. If you look at current markets, you might see that U.S. investments are outperforming international ones. That may be the case today. But if you look back at 2000-2009, a diversified portfolio of international stocks significantly outperformed U.S. larger cap investments.

So making a blanket statement that international stocks are weaker or under-performing can lead you away from what can be some very smart diversified international investments that can perform very well for you. Don’t count out international funds or investments out of fear. With a solid diversified portfolio including and inviting in international stocks, you may find yourself profiting from your decision to shun this myth.

4. Believing that gold is a safe investment.

If you have some gold in your portfolio, you may see that it performs differently than stocks and bonds. A look back in time will show you that not too long ago, gold was at an historic high of around $2,000 an ounce. A short time later, today in fact we are looking at a price of around $1,200 an ounce. That ‘gold nugget’ bounces around a lot. That’s not to say that one shouldn’t invest in gold. Just be careful and realize gold and other commodities can be very volatile. Again, don’t invest in what’s going on lately. That is a TRAP.

5. Believing that you should invest more conservatively as you near retirement.

Being fearful that you could lose your investment funds through more aggressive investing is a big TRAP. While it’s understandable that as your retirement age nears, you may look at your portfolio and think, “I don’t want to risk what I have.” Of course, no one wants to risk or lose what they’ve accumulated in their investment plans, so this particular myth has some shades of gray and layers to consider.

As you near retirement, your available money may be needed for your healthcare, college funds for your kids and grandkids, and the cost of caring for your parents, not to mention the insidious bite that inflation takes out of your money power. You need your investment money to grow, so that it will continue to work for you while you’re taking care of everyone else.

Going too conservative with your investments can weaken your financial stride at the same time your funds are being weakened by the expenses of this time in your life. It’s a quadruple whammy and a big TRAP that is faced by most of us. Your financial planner can help you adjust your risk tolerance to the right level of aggressive vs. conservative investing. They can also direct you away from the most common investing mistakes, so that you can feel confident that your investing decisions are coming from a wise place (not from fear nor assumptions that can often bring what you fear to become your reality!)

Emotional investing – a common practice to avoid

Although not necessarily a myth, one of the worst times to make an investment decision is when your emotions are influenced by something in the media or in your personal life. When people invest based on events such as elections, divorces, deaths, recessions or other emotionally charged activities, it normally turns out to cost them a lot of money. That’s why having a disinterested third party, like an investment advisor who is not subject to the same emotional persuasions, can be of tremendous value.

If you have made some (or all) of these investing mistakes recently, it’s not too late to correct your course and invest from a place of strength and good guidance.

Listen to our podcast for more details on the top investing myths, plus extra tips on how to point your employees to their own 401K decisions in the smartest way possible.

Bad opinions, common misconceptions and outright misinformation is prevalent when it comes to investing. Being able to separate fact from fiction can help you avoid costly investing mistakes that can prevent you from growing your financial portfolio.