- Consume enough financial media and you're bound to pick up some bad habits or dubious lines of thinking.
- It's worth examining your investing habits and figuring out which might lead you to miss out on valuable gains, or register painful losses.
- Here are some of the biggest investing misconceptions that financial planners hear from their clients.
Investing isn't always straightforward. What's right for one investor may not be right for another, and even when it comes to the overarching principles that apply for most people, it can seem like there are a hundred rules to remember. Chances are you've managed to internalize some of them: Buy low and sell high. Keep your costs low. Don't put all your eggs in one basket.
But consume enough financial media, and you're bound to pick up some bad habits or dubious lines of thinking. Those don't necessarily make you a financial fool, but it's worth examining your investing habits and figuring out which might lead you to miss out on valuable gains, or register painful losses.
For example: "Trust your gut" is good advice in many walks of life, but probably not in investing.
"The biggest single misconception is that investors believe that they should follow their gut instincts about the short-term direction of the stock market," says Keith Singer, a certified financial planner and president of Singer Wealth Advisors in Boca Raton, Florida.
Read on for why, as well as some of the other biggest investing misconceptions that financial planners hear from their clients, as well as the adjustments to your thinking you'd be wise to make.
"Frequently clients call me and say, 'I feel like the market is about to crash. Let's get defensive,'" Singer says. "I ask them, 'What is the historical correlation between your gut instincts and actual market behavior?' Usually they admit not a high correlation."
It's not a problem unique to Singer's clients. When other investors are flocking out of the market, your natural instincts lead you to believe that you'll be left behind if you don't sell, says Brad Klontz, a financial psychology professor at Creighton University. But by selling rather than buying investments when their values drop, you're essentially locking yourself in at poorer prices.
"You need to recognize that you're wired to do everything wrong when it comes to money and investing," Klontz told Grow.
Video by Helen Zhao
The truth is, no one can predict with any certainty what the market will do over the short term. "Just look at this past month," says Singer, pointing out that war in Russia, rising interest rates, and high inflation led to extremely negative sentiment among investors. "What happened? Russia invaded Ukraine and the S&P shoots up 10%."
Instead of trying to figure out what the market will do tomorrow, which can lead to underperformance in your portfolio, focus on your long-term plans, experts say
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," says David Haase, a CFP with RPT Wealth Strategies in Hillsborough, New Jersey. "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, says Jordan Benold, a CFP with Benold Financial Planning in Prosper, Texas. "One misconception is that the more funds you are invested in, the more diverse your portfolio is," he says. "This statement is not valid."
Video by Courtney Stith
Investors would be wise to invest in a companies of different sizes while aiming for a balance between domestic and international stocks and even between growth and value-oriented names, investing experts say. 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. "Be aware of what you're tilting toward," says Todd Rosenbluth, head of research at ETF Trends. "You don't need to look at the entire portfolio of every fund you own, but you can use top ten as a reference point."
Or you can keep things relatively simple by owning a few funds that cover broad swaths of the market. "I believe if you get a total market U.S. stock fund, a total market bond fund, and an international total stock fund, you are in the ballpark for a good portfolio," says Benold.
Some investments are more or less volatile than others. When markets slide, stocks tend to decline more sharply than bonds, for instance. And the same is true within asset classes: bonds, such as Treasurys, which are backed by the U.S. government have never defaulted, while corporate IOUs with low credit rating carry a relatively high risk of that happening.
But while some investments are less jumpy than others, none are risk-free, points out Leslie Beck, a CFP and Principal at Compass Wealth Management in Rutherford, New Jersey, whose clients tell her "'I want a 'safe' investment so I won't lose money.'"
"There's no such thing as a 'safe' investment," she says. "All investments are subject to potential loss."
Video by Helen Zhao
Stashing cash in a bank account or under your mattress isn't risk-free, either, adds Haase. And "even a savings account is subject to risk: inflation risk," he says. "If, hypothetically, a savings account is earning 0.5% and inflation is rising by 2%, then the buying power of the savings account after one year will have dropped by -1.5%."
Part of setting up a long-term investing plan Is understanding your tolerance for the various types of risks that come with the investments you could hold and to build your portfolio accordingly. Generally speaking, younger investors saving for a long-term goal, such as retirement, have the ability to hold riskier investments, such as stocks, which have historically offered high long-term returns.
Conversely, those saving for short-term goals would be wise to gravitate toward lower-risk vehicles such as savings accounts, experts say — even if that means giving up some purchasing power to inflation.
The views expressed are generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. There is no guarantee that past performance will recur or result in a positive outcome. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses.
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- ‘The greatest predictor of success in markets,’ and how to take advantage, from a financial advisor
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- Here’s how much money you’d have now if you invested $1,000 at the start of the bull market in 2020