Myths and Truths About Investing

Over the span of my career, I’ve come to realize that when it comes to investing there are many myths and misconceptions that, unfortunately, get in the way of success for a lot of ordinary investors. Like all good myths, some of them are grounded in the realities of the markets, and many times they are even encouraged by what we see or hear in the media, but experience shows that falling for them is a sure way to get poor results out of your portfolio.

For this reason, I want to take an opportunity in this article to dispel some of these myths, and to also offer some basic truths that, while sounding simple, are sure to help investors that put them into practice.

Let’s begin with some of the most common misconceptions:

It’s all about predicting the market’s next move. Many investors think that the key to success in investing is trying to anticipate what the market will do next. We hear stories about famous traders who predicted a crisis and think that this is the way to make money in the markets. The truth is that experience shows us that this is rarely a profitable strategy. Since we can’t predict the future, the best approach is to simply be patient and focus on the long run. The famous aphorism that “it’s not about timing the market, but time in the market” is definitely the right approach.

Simply pick the companies you know. Over the last few years, we have witnessed famous companies that make products many of us use everyday grow to incredible valuations and make investors a lot of money. While it’s true that investing in things you understand is the right thing to do, just relying on picking a few stocks whose name you know is no guarantee of good performance.

The stock market is a way to get rich quickly. As the market swings up and down, sometimes with huge moves over short periods of time, we tend to hear stories about people who made the right investment and became millionaires almost overnight. In reality, these “shortcuts” are mostly just down to luck. Trying to make a quick buck in the markets is not only difficult but could in fact increase your chances of reaching a negative outcome. Patience and a long-term focus are key.

It’s complicated. Some people shy away from investing because they think it’s a complicated endeavor, reserved for specialists who understand the intricacies of the markets and all the complex-sounding jargon that is used in the industry. In truth, building a portfolio that is right for your goals and temperament can be very easy nowadays, and you don’t need to rely just on your own knowledge or experience — a trusted professional adviser, or even an app, can help set you on the right path.

It’s like a casino. Investing in the stock market sometimes gets a bad reputation, with commenters saying that it’s rife with speculation and that it’s comparable to gambling. Nothing could be further from the truth. While it’s true that the markets can be volatile in the short term, in the long term, security prices tend to gravitate to their intrinsic value.

You need to always be doing something. Just because the market is open every day, with prices moving in every direction, does not mean that you must respond to what the market is doing. Stocks and bonds are like any other asset: just because they’re easier to buy and sell than, for example, a house, does not imply that you have to be buying and selling constantly. Looking at the value of your portfolio everyday can be, in most cases, rather counterproductive.

And now, let’s get to the actual good advice — the things that, if you get them right, will stack the odds in your favor and help increase the likelihood of reaching your investment goals:

Diversification is key. This is probably one of the most repeated recommendations when it comes to investing, and with good reason. Diversification can help an investor set the risk of their portfolio to the right level, protect them from the risk of permanent loss, and even smooth out the ride while not necessarily sacrificing a lot in terms of return.

It’s best to forget about the headlines. The media constantly bombards us with information about looming crises, global conflicts, political disputes, among many other negative narratives that may have an impact on the value of our investments. While it may seem prudent for an investor to react to this information and make changes to their portfolio, the fact is that most of the time these reactions just get investors in trouble. If you have a diversified portfolio of high-quality investments, the right move is to focus on the long term and ignore the short-term volatility.

Risks aren’t always obvious. Volatility, or changes in prices, can be a form of risk, but it’s not the only one to watch out for. People tend to want to invest in things that have gone up in value, and usually stay clear of things that have gone down — that’s why investors are usually the most optimistic right before a crisis, buying near the top, and most pessimistic after a market drop, afraid of buying or even wanting to sell. In truth, all else being equal, buying a security after it has gone up implies a higher risk than buying it after it has gone down, so don’t be afraid to stick to your plan and invest when things look scary.

You need to have a plan. If you don’t set goals and only focus on how much your portfolio is worth every day, it will be very hard to keep the discipline and to even know what type of investments are right for you.You need to state your goals first, know the types of risks you are comfortable facing, and then design your portfolio around those variables. Most people have more than one goal they want to achieve with their money, and investing for your retirement will be completely different than investing in an emergency fund.

It’s more about EQ than IQ. Success in investing doesn’t come from trying to outsmart everyone else. Rather, it’s a long quest that requires patience and discipline, and many times our emotions will want to get in the way. We may be nervous about a drop in the markets or frustrated that building wealth takes time, but taking the emotions out of the equation is the best way to avoid costly mistakes.

It’s all about the long term. As we mentioned before, time is actually an investor’s best friend. If you have a good, diversified portfolio, the discipline to stay invested through the ups and downs of the markets, and continue to contribute money to your investments over the course of your life, the returns will take care of themselves through the power of compound interest.

I hope some of these tips can be as helpful to you as they’ve been for me, and wish you the best of luck in your investment journey!