The 8 Biggest Lies of Investing
“I’m from the government and I want to help”. We have all probably heard that statement and chuckled at the sentiment. While we can all laugh at the inefficiencies of government there are 8 false beliefs concerning investing that I would like to draw your attention to.
Let’s take a look at the list.
1. ”Money in the bank or CDs is safe.” People tend to believe their money is safe in the bank and they can’t lose any of it. In our current, extremely low interest rate environment, banks are paying far less than 1% for money markets and short term CDs (http://www.bankrate.com/cd.aspx). Inflation has hovered around 3% for the last few years.(http://inflationdata.com/inflation/Inflation_Rate/Historicalinflation.aspx) Consequently, investors could be losing up to 2% a year in spending power on some of the money invested in CDs if inflation stays the same.
2. ”I have many years to start saving and investing. I’ll wait till I get that raise at work.” The truth is time and the power of compounding interest are working for you or against you. By saving even modest amounts over a long time you can harness the power of compounding interest. Some people never see the “good part” of the compound interest curve because they start too late and don’t have enough time for the money to compound multiple times.
3. ”I will write the check to invest next month. Things are a little tight this month. For many people it is difficult to save diligently and regularly. (http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm) There is always an excuse to not do it. One way to help remedy this problem is to set up a system so your saving and investing are automatic. By using an auto draft, the money flows from your checking account to your investments every month on a certain day. You don’t see it and are less likely to miss it and it goes to work for you automatically.
4. ”The stock market is too risky.” While all investing involves taking some risk, the question is “Does this investment offer reward that is commensurate with the amount of risk you are assuming?” While you need to be conscious of your own risk tolerance by if you avoid any exposure to stocks, you reduce the opportunity for growth. This would not seem like a smart move.
5. “My friend/brother-in-law gave me a tip on this new stock/investment.” This is likely not a wise strategy as often by the time an investor might act on a “hot tip”, the existing investors have enjoyed some appreciation. Just when the new investor buys, the existing ones decide to take some profit and they sell. As more sell, the price of the shares continues to go down. Once the new investor realizes this, he has lost a significant amount. The rule is to buy low and sell high. However, often with individual retail investors this happens in the reverse order. (http://faculty.haas.berkeley.edu/…/Individual_Investor_Performance_Final.pdf) One of the hazards of acting on tips is that you can buy when the stock is “hot” and selling at a premium and sell when no one wants it. By doing so, we have bought high and sold low, -the opposite of what we should do.
6. ”Buy and hold is the way to make money”. 2008 taught most investors that this common held belief is not always true. Every asset class has its up and downs. While we can’t predict the future we can employ strategies to limit declines to assets portfolio by being diligent. By using certain tactics, such as diversification across multiple asset classes we can work to offset or hedge against decline in the value of the investments.
7. ”I can do all my financial accounts myself.” Most of us do something for a living other than manage investments. We are very good at what we do and most if not all of our income comes from our work. While everyone should be knowledgeable about their investments, to assume they are experts in the field is short-sided. Once you have communicated your goals and desires, allow an experienced advisor to work with you to help you reach them. Use the expertise and tools which he has to guide you through the financial maze of life.
8. “All financial advisors are the same”. Nothing could be further from the truth. Find someone who you click with personally, is honest and is competent. It’s a good thing to pick someone who is familiar with your particular business or situation. You want a relationship with your advisor that can last for many years. Look for someone who will return your phone calls promptly.
We have shared what we feel are some of the most commonly held false beliefs in the world of finance. By being aware we are hopeful this will help you make a more informed and effective decision on selecting an advisor.
Dr. James Pitts is a Registered Investment Advisor Representative and Financial Planner. He ran a successful dental practice for 25 years and by using financial planning techniques and investing wisely, he was able to retire at 51 financially independent and debt free. His passion is to help other people reach their financial goals and live the best life.
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Dr. James R. Pitts