Common Financial Myths Debunked

Common Financial Myths Debunked – Part 5: Investing

December 21st, 2010 Brock Hailes Leave a comment Go to comments

This is the final installment of our financial myth-busting series. We’ll close by going over the myths associated with investing. Be sure to check out the rest of the series.

When it comes to financial myths, there is no category with more mistaken beliefs than investments. Whether you’re talking about investing for retirement, in the stock market or even more sophisticated assets like real estate, commodities or bonds, there are so many “experts” with varying opinions that it’s hard to grasp just a few that really work for your strategy.

It doesn’t matter if you’re just a passive investor or an aspiring day trader, there are a few common financial fallacies that need to be cleared up before you start making your millions.

Myth #1: Investing is too complicated.

This is perhaps the most common reason why people hold off on investing in their retirement or even in general. Yes, investments carry a certain level of risk–the crash of 2007 can attest to that–but not all assets are the same. You don’t have to invest in anything you don’t understand. In fact, it’s probably you don’t. If you devote a little time into teaching yourself some Investing 101, you’ll find that it isn’t nearly as scary as it seems.

Poke around free online tools like Yahoo! Finance and Google Finance, and before you know it, terms like P/E ratio and dividend investing won’t sound so foreign to you. You’re doing yourself a disservice by not trying at the very least.

Myth #2: I can always trust a financial adviser.

There’s a reason why stockbrokers are a dying breed. Jilted clients that got burned by these product pushers started migrating over to online brokerage accounts so they could manage their investments themselves. That doesn’t mean that all financial professionals are bad, however. If your stockbroker or financial adviser is getting a commission on the investments they’re “recommending” to you, you should investigate whether their motives are in line with your goals.

If, on the other hand, they have a proven track record and have taken the “fiduciary”–keyword!–oath to put your financial goals ahead of their own, chances are their advice is more credible. The Securities and Exchange Commission has a nice checklist of things to look for before handing over your money and trust to an adviser. Regardless of whether or not you find a good one, however, it’s always a good idea to know how your money is being invested.

Myth #3: Investing is the key to getting rich quickly and easily.

An investment of a lifetime, by definition, only comes once in a lifetime–if that. So why do you hear about them all the time? That’s just greed talking. Maybe you know someone who made a nice mint on a high-return investment or some hot stock tip. Chances are they took on enormous risk to do it, and for every one of them, there are probably 10 other investors who lost out big. That’s speculation; not investing.

True investing is diversifying your asset types, buying sound investments and aiming for reasonable returns to achieve your goals gradually. You have to manage the potential for the downside as much as you’re shooting for the upside. Focusing on home runs all the time will only lead to more strikeouts.

Myth #4: Always buy low and sell high.

If it were that easy, everyone would be billionaires. Buying low and selling high looks good on paper, but that would require timing the market. Even the most seasoned investors will tell you that timing the market can have disastrous effects. There’s a term you should know: “Falling Knife.” It’s when investors try to pick an investment they think has bottomed, but only to see it drop further or completely bust after they’ve bought it.

On the flip side, trying to wait for your investment to reach it’s top could mean watching all your profits disappear as it comes back down. This is why buying low and selling high sounds good, but isn’t a good strategy to live by.

Myth #5: I should invest in the companies I like.

This age-old advice sounds practical enough on surface, but no one should be penalized for having bad taste. Looking at companies that provide products and services that you use frequently is a good way to become more aware about available stocks and investment opportunities, but it shouldn’t be a barometer of what you invest in.

There are countless examples of companies and business opportunities that had great concepts and became popular, but for one reason or another, flopped completely. Red flags could range from poor management, high debt levels or low sales. Just remember, when it comes to investing, a little common sense goes a long way.

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