Over time, you will run into various suggestions for investing successfully. Upon closer inspection, however, many of these ideas turn out to be “myths” that could cause you trouble if you treat them as solid advice.
Here are five of these myths, along with some reasons for ignoring them:
• You can find the next “big thing.” All of us probably wish we could have “gotten in on the ground floor” of Apple or Microsoft or some other tremendously profitable company. And who knows? There may indeed be a similar other business out there, waiting to take off. But it’s almost impossible for anyone to identify these potential “blockbusters.” There’s really no shortcut to investment success – you need the patience and discipline to invest for the long term, and you need to build a portfolio that’s appropriate for your goals and risk tolerance.
• Investors should always seek to “buy low and sell high.” This is actually good advice – or it would be, if it were possible to consistently follow it. But how can you know when the market is “high enough” to sell or “low enough” to buy? You can’t – and neither can anyone else. Trying to time the market rarely works.
A more appropriate strategy is to invest regularly and to diversify your holdings among stocks, bonds, government securities and other vehicles, based on your goals and risk tolerance. Diversification can help protect you against market downturns that primarily affect just one asset class. Keep in mind, though, that diversification can’t guarantee profits or protect against all losses.
• It’s always smart to buy investments that have performed well recently. You may have read, in investment prospectuses, that “past performance is no guarantee of future results.” These words are certainly true; just because an investment has had a good run recently, it doesn’t mean its success will continue indefinitely. You need to evaluate each investment on its own merits and on how well it fits into your overall portfolio.
• International investing is too risky. In today’s global economy, it may be more risky not to invest some of your portfolio internationally. U.S. stocks represent less than half of global stock market capitalization – so by stopping at our borders, you are depriving yourself of a world of opportunities.
It’s true that foreign investments carry some special risks relating to currency fluctuations and political and economic events, but you can help contain this risk by confining your international holdings to a relatively small percentage of your portfolio. A financial professional can suggest the best ways for you to add a global element to your investments.
• You need a lot of money to make a lot of money. Of course, it doesn’t hurt to have a sizable amount of money to invest right away. But the world is full of people who started investing with small sums and ended up having enough money to enjoy the retirement lifestyle they had envisioned. If you’re just beginning to invest, put in as much as you can afford each month; as your income goes up, increase your investments. As an investor, time is your greatest ally.
Sticking to a consistent investment strategy can help you write your own investment tale – and you can leave the myths to the storybooks.