7 Investing Myths That Are Quietly Costing You Money
Investing always carries a measure of risk, but many investment risks are avoidable, stemming from misinformation, a reliance on outdated advice or a belief in fear-based myths.
You don’t need complicated strategies or high-priced advisors to set yourself up for success. Keeping it simple is the best way to keep your retirement-savings goal on track, so don’t let common misconceptions about investing trip up your investing plan. Here are seven examples of myths that can lead you astray, and what you should do instead.
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Myth 1: You must time the market
It’s a classic adage of investing that time in the market beats timing the market. And it's true: Staying invested for the long haul is the path to prosperity. The upward movement of the market plus the power of compounding interest will help your money grow over time.
Practicing dollar-cost averaging by automating contributions into your 401(k) helps smooth out volatility and keeps you on track.
Myth 2: High risk always equals high reward
Going all-in on a single stock or sector — say, tech stocks — increases your concentration risk.
Low-fee investments, such as passively managed index funds, give you broad market exposure, which protects you if a single company or sector experiences a downturn. Minimal fees let you keep more of your earnings and build wealth faster.
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Myth 3: You should sell when the market drops
Panic selling when stocks fall is a mistake because it locks in your losses. History has shown that the biggest gains for stocks come in the aftermath of the biggest routs.
If you’re feeling anxious about your portfolio’s bottom line, check in on your emergency fund instead. Experts advise three to six months’ worth of living expenses if you’re employed, and at least double that for retirees.
Myth 4: Past performance predicts the future
Past performance is not an indicator of future results. This ubiquitous disclaimer on investments can be easy to overlook, but it’s important to keep in mind.
Historical returns for a mutual fund, exchange-traded fund (ETF) or other investment is backward-looking data. In a dynamic, forward-looking market, consider costs and diversification instead. Forward-looking criteria about fees and the underlying securities held by funds can better guide your investing choices.
Myth 5: You should stick to domestic stocks
The U.S. has the world’s biggest economy — but you shouldn’t overlook the rest of the world when it comes to investing.
Developing economies, while volatile, have much faster rates of growth, and global exposure is a good hedge against a domestic economic downturn. Allocating around 20-30% of your portfolio to international and emerging market mutual funds or ETFs can allow you to take advantage without taking on too much risk. Broad-based index funds balance growth with risk mitigation.
Myth 6: Only stocks beat inflation
Investors who want a diverse portfolio with inflation protection have numerous options besides stocks. Treasury Inflation-Protected Securities (TIPS), which are specifically designed to adjust for inflation, along with assets such as real estate and commodities — including precious metals like gold — tend to increase in value when inflation rises.
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Myth 7: You need a complex portfolio
While investing can be complicated, it doesn’t have to be. And for most of us, it shouldn’t be. Derivatives like options and futures can be useful for sophisticated investors, but the added leverage they require makes them riskier.
With a simple, three-fund portfolio consisting of U.S. stocks, international stocks and bonds, you can realize returns on par with — or better than — more complex instruments.