Avoid Common Investor Myths
Michelle R.
Alberda, Joanne F.
Jordan, and Brandon J. Miller
are Financial Advisors with
Ameriprise Financial Services, Inc. based in San Francisco,
California and can be reached by email at
joanne.f.jordan@ampf.com ,
michelle.r.alberda@ampf.com,
brandon.j.miller@ampf.com
One
of their specialties is comprehensive financial planning for gay
and lesbian individuals and couples.
Click
here to visit the website of Michelle R. Alberda,
Joanne F. Jordan, and Brandon J. Miller
A
myth is a story or idea that is repeated so often that we often
accept it as the truth. In
the world of investing, there are many myths that investors
commonly believe without questioning.
These investor myths sometimes lead investors astray, and
can not only harm consumers’ investment portfolios but also
their overall financial well-being.
Following are some of the most common investor myths and
tips on how to avoid them.
Myth
#1 – Beating The Market with Market Timing: Wall Street is not in Las Vegas, and investing is not
gambling; yet many consumers believe that a risky investing
strategy will assure them in “beating the odds”.
Unlike gambling, where the odds always favor the house, the
stock market has historically provided positive returns to
investors over time. However,
past performance is not a guarantee as to future investment
results.
This
myth that you can “beat the market with market timing” often
leads investors to apply risky, short-term strategies such as day
trading - where investors attempt to predict the market’s
day-to-day fluctuations. The
biggest risk from this strategy is that if investors are focused
on predicting the stock market’s performance short term, they
often miss out on the stock market’s potential for long-term
gains.
Myth
#2 – Belief In The Market Guru:
According to this related myth, there are a few exceptional
individuals who are able to predict the ups and downs of the stock
market. “The Market
Guru” can be a relative, your neighbor or a commentator on the
news. In any case,
the belief is that their advice, or their “hot tips”, will
help you “beat the market”.
The sheer success of stock market commentators, authors,
websites and newsletters dedicated to predicting the stock market
is testament to public demand for this kind of information and the
number of people that believe this myth.
However, the truth is that no one has been able to
consistently predict the direction of the stock market over time.
To
avoid falling prey to these first two myths, you must stay focused
on your investments as a means to reach specific, long-term,
financial goals such as your retirement, buying a home or paying
for your child’s college education.
Myth
#3 – The Stock Market Is Only For The Wealthy:
Another very common misconception is that investing in the
stock market is only for the wealthy.
The belief is that it takes a lot of money to begin with in
order to help increase your wealth.
However, investors can seek to accumulate wealth by
starting with a relatively small investment, especially if they
have time on their side and they take advantage of the long- term
effects of compounding. Compounding
can be defined as the reinvested growth and income from a holding
that, over time, can produce significant growth in the
holding’s value.
Revise the example, and include a statement that these
figures are shown for illustrative purposes only, are not
guaranteed, do not represent any specific investment or product
and do not take into consideration taxes or investment product
fees and expenses. In addition, do not use a specific benchmark
like the stock market, unless you define what category within the
market you’re investing in (i.e. bonds, small cap stocks,
etc…) along with any additional risks associated with that
investment, date & source the specific rate of return quoted
for that investment class, and include the past performance
disclosure. I’d suggest making the example more general (i.e.
assume you invest $1000 at an average rate of X% make this a
modest and relative figure, etc…)
Myth
# 4 – What Goes Up Must Come Down & Vice Versa: This is the belief that when an investment keeps going up,
that it will eventually have to come back down or that when a
particular investment is going down it will inevitably go back up.
The problem with this myth is that investors can sit on the
sidelines, waiting too long before they buy or sell an investment
missing out on significant gains or suffering serious losses.
To
avoid succumbing to this myth, there are two tips investors can
utilize. First,
investors can practice dollar-cost-averaging, an investment
strategy in which predetermined amounts of money are invested on a
regular basis, so ultimately more shares are purchased when prices
are low, and fewer are purchased when prices are high.
Add DCA disclosure here, in the text of the article.
To avoid
holding on to an investment for too long, investors can also use a
stop-loss strategy. As
an example, when you buy a new stock, you can put in place three
stop-loss sales. Each
stop-loss will protect a percentage of your gains.
If your investment reaches the stop-loss price, a sale is
automatically triggered locking in your profits. This is a
relatively concept to describe here. The rest of the article is
much more general. Suggest removing this tip, especially since
individual stock sales are not nearly as popular of an investment
as mutual funds and therefore this tip may not apply to many
investors.
The best way for an investor
to try and avoid many of the most common investor myths is to have
a solid investment plan, which includes a detailed examination of
your personal finance goals, your time horizon, and an analysis of
your investment risk tolerance.
A qualified personal financial advisor can help you develop
and implement this comprehensive investment plan.
# #
#
This
information is provided for informational purposes only. The
information is intended to be generic in nature and should not be
applied or relied upon in any particular situation without the
advice of your tax, legal and/or your financial advisor. The views
expressed may not be suitable for every situation.
Ameriprise Financial Services, Inc.
Member
NASD.
American Express Company is separate from Ameriprise Financial
Services, Inc. and is not a broker-dealer.
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11/04
