Table of contents for Myths
In the past I have shared some investing tips and written on how to detect investment scams, but have not to shed some light on common investment myths. In this part of our myth series we will debunk a few common investing myths, please be sure to share your thoughts.
Investing is too Risky
If you do not know what you are doing, investing can be very risky – driving without knowing how to drive is risky too. Of course there is a chance that you’d lose some money, but even if you do not invest you will lose money – due to inflation, which decrease your money’s purchasing power. Understanding and having a plan can take away some of the fear associated with investing.
My Broker or Advisor Can Help Me Pick The Best Mutual Funds
Chances are your mutual funds sales representative gets paid a commission on the funds sold hence the more expensive funds can provide them with better income. Furthermore, mutual funds are not the best investment option for most investors; they have underperformed most of the time and cost too much money.
Bond Markets Are for Losers
Often investors underestimate the size of the bond market; the bond market is several times the size of the stock market. Bonds are a vital part investment portfolios and can often provide great returns. The recent credit crisis created a great opportunity for investors to enter the bond market as credit spreads. Bonds provide steady income as well as an opportunity for capital gains; do not underestimate the power of the bond market.
The Best Time to Invest
Trying to time the market is a classic novice investor mistake. Trying to time the market often will cost the investor thousands of dollars; the best strategy is to invest consistently regardless of the market condition. The best time to invest is always right now.
Diversify as Much As You Can
Diversification is the most important component of your investment plan, you will hear financial gurus and advisors talk about diversification constantly and they are right. However, diversification does not mean buy random stocks or funds. The purpose of diversification is to reduce risk by holding non-correlated investments. Furthermore, studies have shown that risk reduction through diversification becomes negligible once you hold about 25-30 securities across sectors and industries.
Mutual Funds Are Your Best Bet
The mutual fund industry spends millions on their advertising and sales force to convince you of this myth. The fact is that mutual funds consistently underperform the index they follow, they cost too much and advisors make a large chunk of their income from them. Often they are sold on the bases that they are run by professional money managers who spend a lot of time studying the markets, the truth is that the average investor can outperform over 90% of mutual funds by investing in index funds and ETFs.
Investing may be risky but so is everything else in life. With a little bit of research and some time you can build a decent portfolio at a reasonable cost.
What investing myths do you have to share? Have we missed any other important myths?
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Article by Ray
Ray is an ex-financial adviser and the founder of Financial Highway. Currently working in the financial industry and working towards completing his Chartered Financial Analyst, CFA, designation.
Ray has written 271 articles.
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{ 6 comments… read them below or add one }
Buying a house is the best investment you can make?
I heard a story recently about someone who bought a house for $50,000 and 35 years later, it was worth $200,000. They were very proud of themselves, but what they didn’t realize is that their return on investment was only about 4%!
I’m a huge proponent of index funds. While some people may be able to beat the indexes, the average person is better off saving their money by paying low fees and getting a solid rate of return.
I must say that diversification does work. I think that having 3 or 4 mutual funds: 25% Internationsl, 25% Growth, 25%Income, 25% Small Cap can help someone through the ups and downs of the market.
@Daniel good one! I am trying to explain that to a friend of my right now.
@Ken I agree diversification is a must for a proper investment portfolio, however I was referring to over-diversification and random diversification, often when I talk to people about this they tell me how much they have diversified by randomly selecting funds and stocks.
Selecting as many funds as possible isn’t diversification. Then you get overlapping investments and you’ve done exactly the opposite of what your goal was.
I totally agree with your comments on mutual funds. There is a mountain of data which indicates a low cost index fund will outperforms the majority of actively managed funds.
What I cannot understand is why so many people chase the latest hot performing mutual fund only to end up worse off than if they would have parked their money in a boring index fund?
Maybe a better financial education in our schools would help…
After reading “The Little Book of Common Sense Investing” and seeing that over a 50 year run, only a handful of mutual funds have beaten the 500 index – I’m talking like 5 out of 4000 – I have sworn of actively managed funds altogether. Why put my money in someone else’s pocket when I don’t need to?
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