Understanding the myths and ignoring the voices will make you better
Wall Street has three voices it wants you to listen to and nine myths it wants you to believe. They are designed to allow “The Street” to keep making money from you. Exposing them will help you be a better investor.
In today's volatile investment environment, you will hear three voices from The Street:
- One is the hysterical shouting of the panic-stricken, telling you to cash in all your investments and keep your money in a sock under your bed.
- A second is the comfortable pacification of the passive, urging you to wait out the long-haul with no changes to your portfolio.
- A third voice: the persuasive promise of the get-rich-quick crowd, whispering secret formulas guaranteed to line your pockets with gold.
Either way, Wall Street gets a cut.
You need to go beyond the voices, and listen to reason that calms the panic, refutes passivity and debunks so-called secret formulas.
Nine Wall Street Myths (#7 – #9)
Here are three of the nine investment myths that Wall Street wants you to believe:
Investment Myth No. 7
Diversification of assets will always protect your investment. Diversification is important, but is overrated as a means of controlling risk. The reason? During catastrophic events, most assets become highly correlated, meaning they drop together. So diversification does very little to protect your portfolio.
Put simply, when one block is pulled out, the whole tower comes tumbling down. The success of a portfolio is not just the result of its holdings, but the quality of the underlying investment process. This process should include a healthy exit strategy and carefully set loss-control measures. There is no way to insulate yourself from risk through diversification alone.
Investment Myth No. 8
Time in the market reduces risk. Common market philosophy states that successful investing is accomplished by staying fully invested over the long-term, to capture the market’s average return. However, the idea that holding an investment long enough will somehow reduce risk is greatly flawed.
Mathematical calculations prove conclusively that the risk associated with wealth does not decline by extending your time horizon. Nobel Laureate Paul Samuelson probably said it best: The longer you hold an investment, the greater your chances are of suffering a crash or a series of crashes.
It is not a question of time in the market that will bring you financial success, but a well-founded investment strategy.
Investment Myth No. 9
The best strategy is to set it and forget it. Successful stock investing takes more than a single decision to buy a mutual fund or a basket of stocks. After all, the market environment changes over time, as do your personal needs. Doesn't it make sense that your investment strategy needs to change, too? The best way to navigate the stock market is to move with it.
If you're standing still, eventually you get run over. The penalty for taking a passive approach to investing is (at best) taking unnecessary risk, and (at worst) experiencing a devastating loss. The reward for taking an active approach is the ability to control risk and gain steady profit.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by FMeX.
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