If you believe every myth you hear, you’d be convinced that boot camp is exactly like Full Metal Jacket or that your tenure in the military will be filled with shooting guns at bad guys. Doing your homework and finding out the facts is a way to avoid making poor decisions in anything, including with your money.
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Here are 5 of the biggest myths about investing. Don’t let these keep you from making money.
Myth 1: It’s too late to start/I don’t have enough money to start
J. Patrick Berry, president at CONCERT Retirement Plan Consulting, says he has met with many clients who look defeated and are upset about their lack of savings or bleak outlook.
It’s a common myth that it’s too late to start, but you may have to do more to make up for lost time—saving more than if you had been compiling money over the years, said Berry. This Vanguard study compares the value of portfolios at different savings rates over the years and demonstrates that you can make up for lost time by increasing your contribution rate each year.
Others think they don’t have enough money, and are waiting until they have a large round number to get started. Experts say that there is no right number, and suggest getting into the market as soon as possible with whatever money you can.
Citing the power of compounding, the rule of thumb, according to Greg Woodard, senior analyst at Manning & Napier is, “the earlier the better.” The takeaways here are simple: today is better than tomorrow to start; investing more is better than investing less; any amount is better than nothing.
Myth 2: Market timing works
“Market timing doesn’t work, because in order for it to work you have to be right twice,” said Rebecca Hall, managing director at RBH Global Wealth Partners. You may be able to get lucky once, but for market timing to work, you have to get in and out at the right time (or conversely, out and then back in).
Thinking you can time the market is an emotion-based strategy. A systemic strategy is best—sticking to a plan over the long run.
“Having your emotions drive your financial decisions usually will bring you to the wrong conclusion. At the end of the day you need to get invested and stay invested,” said Hall.
Myth 3: What someone else is doing will also work for me
Investors in general are inclined to take advice and think that what will be right for others will be right for them. However, what others are doing, or advice that was given to them, may not work for you.
“Investing is, and should be, specific to your timeframe, risk tolerance, objectives,” said Hall.
Similarly, experts give blanket statements that don’t apply to all individual situations, so be careful of reading about generalizations and applying them to you. Do your own research and stick to your own plan.
Myth 4: Owning past winners means future success
One Vanguard study tracked all actively managed U.S. equity funds covered by Morningstar from 2004-2013. It found that of the 39% of funds that outperformed benchmarks from 2004-2008, 78% of those underperformed benchmarks from 2008-2013. It boiled down to only 8.6% of funds outperforming benchmarks in consecutive five-year periods.
Simply picking last year’s winner and expecting the same results is not a sound strategy. Very few investments make it into the top performers list on a consistent basis, according to Hall.
Myth 5: Risk and speculation are the same thing
Investors are often confused about the definition of risk with respect to investing. Risk is inherent with being in the markets; there are no guaranteed returns in equities and therefore you are taking on some kind of risk just by being in the market—your principle is not guaranteed like in a CD or savings account.
Where many get confused is thinking that risk means “speculating.” Speculating is guessing on next years’ winner or taking a flier on a “hot tip,” which is a whole different animal, and a dangerous game, according to Berry.
Sometimes investors think that by taking a “big risk,” they can net a higher return. Research has shown that “a higher contribution rate can be a more powerful and reliable contributor to wealth accumulation than trying for higher returns by increasing the risk exposures in a portfolio.”