Investors today have a lot more information available at their fingertips, and that data can be both empowering and dangerous. While financial advisors can help clients navigate through the evolution of their financial plan, there are still a handful of investing “myths” that are difficult for investors to shake.
Here are five common misconceptions about investing that lead to avoidable mistakes.
1. Going With Your Gut.
In many situations, you’re told to “trust your gut.” When it comes to investing, however, an incredibly common mistake many people make is to invest based on their “feelings” – which is often rooted in past experiences rather than focused on the future.
People get into trouble by having expectations – both positive and negative – about the market which aren’t based on historical evidence. Over time this tends to result in lower returns because individual investors will get out of the market when they feel like a market downturn is coming and get back in when things look clear. This is effectively like buying high and selling low, which is the opposite of a prudent investment strategy.
2. Inflation’s Got Nothing On Me.
Individual investors tend to underestimate the loss of purchasing power over time due to inflation. One of the most common mistakes we see with people heading into retirement, for example, is the desire to “protect” their savings. The fixation to avoid touching the principal of their savings drives them towards investments that are not entirely suited for a 30 to 40-year retirement in which the cost of goods and services may double and possibly double again.Protecting ones purchasing power is what people should be concerned with and, historically, investing in companies (via the stock market) has been a good long-term hedge against inflation.
3. Relying on the “Consensus” View.
It is important to remember that, whether considering the economy or the market, the “consensus” view of the future is the outcome that may likely not happen at all. In other words, whatever everyone thinks is going to happen, or whatever the dominate opinion is in the news, is likely already priced in to the market. Almost by definition, the surprises are events that few people saw coming.
4. Investing in the Market as a Shortcut.
Investing in the markets will not save someone who has not prepared for the future by saving. And saving alone, without investing, will not protect someone from inflation over the long run.
Successful long term financial planning is a combination of reasonable budgeting – saving while you are working and spending an appropriate amount when you are retired – and investing in a way that requires no guesswork. Capturing long term global growth requires investing in as many companies as possible (diversification) and then ignoring the temptation to make changes. The best way to do this is to start with a portfolio that is right for the individual and will allow them to ride the long-term ups and downs of the economy and the market.
5. Your Advisor, The Fortune Teller.
There is a common notion in the public and financial media that given enough information economists and financial advisors can predict the future. But no one has a crystal ball, and so many factors can impact the economy and the market at any time.
The market (stocks, bonds, commodities, etc.) is considered to be a six-to-nine-month forward-looking indicator meaning it is telling you what people think is going to be true sometime in the future. But even this is not always accurate.
From a long-term investment standpoint, if you simply accept that we can’t predict the future you logically end up investing in a way that doesn’t require it. That is, you broadly diversify between stocks and bonds to capture the market returns, and get on with enjoying life.
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Justin deTray is a Principal Advisor at Private Ocean Wealth Management. Previously, Justin was a career entrepreneur, beginning in his youth when he helped his mother run a small family business out of their home. Self-employed for much of his career, he worked as a small business technology consultant and later founded and ran a small hedge fund in New York City. With an education rooted in Economics and Physics, he is an energetic problem solver with real-world experience.