Four Investment Myths Revealed
Investment Myth: The Secret to Being a Great Investor is Intelligence & Hard Work
Wall Street, the media and Hollywood have done a masterful job convincing young professionals and investors across all spectrums that being a great investor is something reserved only for the smartest and brightest minds. That successful investing requires the ability to predict the future and that a select few can, based on fancy charts and graphs, do just that—they can predict the unknowable.
And while certainly a basic understanding of important investment concepts and definitions, such as diversification, risk, returns, stocks and bonds, are important, the real secret ingredient to investment success has little to do with your brain power.
Instead, being a successful investor is ultimately about self-regulation. It’s about your ability to remain disciplined through the euphoria of dramatic peaks and disparaging troughs. It’s about being patient enough to understand that much like mastering the piano, successful investing is not about becoming an overnight success, but rather winning the slow and steady race over decades, not years.
The Takeaway: Focus less on how do you find the brightest investment expert who is so smart she can pick hot stocks (hint: this is like finding a needle in a haystack) and more on how can you combat the behavioral urges to sell low and buy high, all while losing sight of the long-term.
Investment Myth: Talking Heads Can Predict the Future
For those unacquainted with the “boohya” master, CNBC’s Jim Cramer, is the epitome of a talking head. He is entertaining—if not at times somewhat obnoxious—incredibly intelligent and has seemingly all the answers to what the future holds for the economy and a myriad of different stocks. On top of that, he delivers his stock pick recommendations with the fervor of a football coach preparing his team for a battle.
Here’s the issue though. His stock picks are wrong 52.4% of the time. Yes, you read that right. A monkey could throw darts at a dart board and mathematically have a better chance of picking stocks successfully than someone who has a daily show on CNBC that millions rely on for investment advice.
So next time you find yourself giving in to making an investment change based on a talking head that seems convincing—and just about all of them do—take a step back and remember that the media is paid to sell advertisements and calmly reminding you to “stay broadly diversified, focus on your savings rate and to keep costs low” is not likely going to sell ad dollars. It will, however, be a key ingredient to your investment success.
The Takeaway: Turn off the TV, don’t watch Jim Cramer, look at your 401(k) and other investment statements only 2-3 times per year and go outside—you’ll be happier too.
Investment Myth: A Great Investor Can Make Up for Being a Lousy Saver
Yes, it is possible to turn a small investment into a massive, retire at 35-sized figure. It is also possible that you could win the Powerball. However, the chances of either of those events happening flirts with the likelihood of getting hit by lightning.
Which is precisely why it’s important to always keep in mind that being a great investor and finding that next hot stock or making just a little bit more on your portfolio will never make up for being a lousy saver—especially as a young professional.
Successful investing has been granted sex appeal by the media and Hollywood, when in fact the real key to financial security in the future has much more to do with your ability to consistently and diligently save, rather than how you can squeeze out another 0.5% out of your portfolio.
The Takeaway: Spend as much time focusing on how much you save each year, as most people do worrying about how their investments have done over the last quarter. Hint: you’ll be far better off.
Investment Myth: “I Have to Actively Manage My Money to be Successful”
Flip on Bloomberg or any of the other financial media outlet and a frequent question is “what should investors being doing with their money now?” or “in light of the Fed’s recent announcement how should investors position themselves?” The stream of pundits talking about what to do now is incessant.
It also completely ill-informs how the vast majority of young professionals should be managing their investments. If you do not yet have gray hair then virtually any news is completely irrelevant to your long-term investment picture and what you should do with your portfolio.
In fact, when looking at the data, volatility—defined as fluctuations in the value of your investments—is inherent in investing, so much so that roughly once a year, the domestic stock market will decline at least 10%. However, in roughly three out of four years over the last nearly century, domestic stocks have still managed to post positive returns.
The Takeaway: Stop thinking that action is the solution to success, when in fact inaction (see discipline and patience above) holds far more weight.
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