Learn How to Invest by Being Aware of These Investment Myths
Investing may be risky but so is everything else in life that you have very little knowledge about. With investment education and adequate practice, you can build a solid portfolio that will withstand the sands of time. However, before you get to that point, you need to fully understand the implications of investment conventional wisdom.
So let’s debunk some of the most common investment myths associated with this conventional wisdom.
Myth #1 – Bear Markets are Bad
Reality: This statement is far from the real truth. The truth is: bear markets make for great investment opportunities. This is especially true if you don’t see yourself retiring anytime soon. So don’t hang up your white flag just yet because some sectors are actually performing. If you have money and can make informed decisions during a fearful time, you can use this type of information to your advantage.
From a stock pickers point of view, bears markets are a great time to buy high quality stocks on the dip. On top of that, you can dollar-cost average your current positions if decide to.
From an option trader’s point of view, bear markets are much more volatile than bull markets. Therefore, you can take advantage of the volatility and erratic price movements.
Ultimately, investors that DO suffer are those that remain fully directional in their portfolio.
Myth #2 – Investing by Yourself Will Increase Your Financial Risk
Reality: The fact is, not knowing how to invest is risky. Even if you decide to go with a money manager, it’s still dangerous if you don’t understand what he/she is doing. Through training and practice, you are able to greatly reduce your risk and be confident that you will help increase the value of your portfolio. To be profitable, you need to create and follow a detailed investment plan based on your own risk profile and investment horizon.
Myth #3 – Investing is Time Consuming
Reality: It’s easier right now to start investing than it has ever been. Technology has allowed the typical investor to know more about the financial markets than any other time in history. However, you should be careful with the type of data you consume because there definitely is no shortage of incorrect information on the web. It’s up to an educated investor to quickly filter through the fluff and create prudent investment decisions from the remaining data.
Myth #4 – Investing in the Stock Market Is Gambling
Reality: Individuals associate the stock market with gambling because both involve money and both seem to contain the same component of chance. Fortunately, investing in the market is never a game of chance. If you invest without proper instruction or are looking to speculate, you might as well stop by Las Vegas and try your chances at the roulette tables.
Investing is all about managing risk and reward. With gambling, the rules are finite. You can’t tweak the probabilities in your favor unlike investing. With investing, you can adjust your strategy along the way to enhance your chances of achieving success and even increase profit.
Myth #5 – Trading Success is Determined at the Purchase
Reality: Even the strongest companies like Apple aren’t purchasing opportunities every time. Even if you purchase at the proper moment, it’s far more sensible to know when you should sell. Successful investors ALWAYS have a plan to adjust their positions or exit their holdings often before the trade is initiated.
Exit strategies have a more substantial effect in investment portfolio performance compared to buying points. This is the case because it is much more difficult to grow your portfolio than lose your portfolio. Therefore, you need to ensure your losses don’t linger and grow. You can never go broke taking a profit whether premature or not.
Myth #6 – Money Managers are Better Suited to Manage Your Own Portfolio
Reality: Many people pay a lot of cash for professionals to manage their money. This would make sense if these money managers consistently beat the major benchmarks – say for example, the Russell 2000 Index. Unfortunately, a lot of money managers do not do better than the major markets.
Having a money manager handling your financial investments may not be entirely beneficial for you. One thing is for sure, with the huge amounts of money they take care of, they cannot jump out of losing positions or rapidly falling markets like retail investors can. With the existing state of the markets, exiting losing positions punctually could be the deciding factor between a lucrative year and a disappointing year.
With the tools open to self-directed investors like ourselves, we can detect trends and price patterns just as well as experts. In the end, you care more for your hard earned cash than a money manager ever will. Money managers and their clients simply have completely different incentives. Clients want to maximize portfolio appreciation while portfolio managers want to maximize commissions. Sure, of course, money managers want to appreciate the value of the funds they control. However in the end, just know that they generally make the same amount of money in a down year than an up year.
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