Separating fact from fiction when it comes to your investments is just as important as it is with any other aspect of your life. Here, four common investment myths get a reality check:
Myth #1You should focus on finding opportunities that could turn into very lucrative “home run” investments.
Reality:You will make more over time by not making mistakes and limiting losses than by trying to hit home runs. This is because losses hurt more than gains help. Consider it this way: if you lose 50% in an investment, you will need to earn a 100% return in order to get back to where you were before the loss.
If you are a mutual fund investor, consider investing in less volatile funds.
Myth #2International investing is too risky, stay domestic.
Reality:In today’s global economy, it is risky not to invest some of your portfolio internationally. The average investor holds about one-quarter of their investments in the global market.
The accepted thinking has been to limit international investing to not more than 15 per cent of a portfolio. That has been true for the past 25 years but going forward that may actually limit returns.
The easiest way to invest internationally is through mutual funds. Consider increasing your allocation of established and emerging international companies with your longer-term investments.
Myth #3Good quarterly or annual returns mean the fund has a good strategy.
Reality:Short-term returns mean very little and a fund that has a good quarter or year is actually more likely to be overvalued than one that has struggled. Long-term returns are a much better indicator.
Instead of focusing on last year’s returns, look at the longer-term track record of the fund manager. How did they perform in a down market? In a strong market? Go to the fund’s website and read the annual report, or read interviews from the fund manager. Studying the management will give you more useful information than yesterday’s performance.
Myth #4A more complex investment strategy is better, complex solutions beat the market.
Reality:A buy and hold, value-investing approach has done the best over the long run despite its boring simplicity. Also, if a fund’s strategy is too complicated for you to understand, how can you ever assess the risk it carries? All of Bernie Madoff’s investors have one thing in common besides losing money: they didn’t understand his strategy.
The reality of strong investment performance is that it is better to limit losses and make steady progress than gamble your hard-earned money on high-risk, volatile stocks and funds.
A good rule of thumb to live by is: consistent returns during the day will let you sleep better at night!
Harley McCormick is a financial advisor at Keystone Wealth Management
The information provided on this article is intended for informational purposes only and is not intended to constitute financial, accounting, and legal or tax advice. For information specific to your situation you should consult a professional. Mutual funds provided through FundEX Investments Inc. Research provided by ADVISOR Research Group, May 24, 2019