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myth is a story or idea that is repeated so often that we often accept
it as the truth. In the world of investing, there are many myths that
investors commonly believe without questioning. These investor myths
sometimes lead investors astray, and can not only harm consumers’ investment
portfolios but also their overall financial well-being. Following are
some of the most common investor myths and tips on how to avoid them.
Myth #1 — Beating The Market with Market
Timing: Wall Street is not in Las Vegas and investing is not gambling;
yet many consumers believe that a risky investing strategy will assure
them in “beating the odds”. Unlike gambling, where the
odds always favor the house, the stock market has historically provided
positive returns to investors over time. However, past performance
is not a guarantee as to future investment results.
This myth that you can “beat the market
with market timing” often leads investors to apply risky, short-term
strategies such as day trading — where investors attempt to
predict the market’s day-to-day fluctuations. The biggest risk
from this strategy is that if investors are focused on predicting
the stock market’s performance short term, they often miss
out on the stock market’s potential for long-term gains.
Myth #2 — Belief In The Market Guru:
According to this related myth, there are a few exceptional individuals
who are able to predict the ups and downs of the stock market. “The
Market Guru” can be a relative, your neighbor or a commentator
on the news. In any case, the belief is that their advice, or their “hot
tips,” will help you “beat the market”. The sheer
success of stock market commentators, authors, websites and newsletters
dedicated to predicting the stock market is testament to public demand
for this kind of information and the number of people that believe
this myth. However, the truth is that no one has been able to consistently
predict the direction of the stock market over time.
To avoid falling prey to these first two myths,
you must stay focused on your investments as a means to reach specific,
long-term, financial goals such as your retirement, buying a home
or paying for your child’s college education.
Myth #3 — The Stock Market Is Only For
The Wealthy: Another very common misconception is that investing
in the stock market is only for the wealthy. The belief is that it
takes a lot of money to begin with in order to help increase your
wealth. However, investors can seek to accumulate wealth by starting
with a relatively small investment, especially if they have time
on their side and they take advantage of the long-term effects of
compounding. Compounding can be defined as the reinvested growth
and income from a holding that, over time, can produce significant
growth in the holding’s value. This is the belief that when
an investment keeps going up, that it will eventually have to come
back down or that when a particular investment is going down it will
inevitably go back up. The problem with this myth is that investors
can sit on the sidelines, waiting too long before they buy or sell
an investment missing out on significant gains or suffering serious
losses.
To avoid succumbing to this myth, there are
two tips investors can utilize. First, investors can practice dollar-cost-averaging,
an investment strategy in which predetermined amounts of money are
invested on a regular basis, so ultimately more shares are purchased
when prices are low, and fewer are purchased when prices are high.
(Dollar Cost averaging does not assure a profit or protect against
loss in declining markets.)
To avoid holding on to an investment for too
long, investors can also use a stop-loss strategy. As an example,
when you buy a new stock, you can put in place three stop-loss sales.
Each stop-loss will protect a percentage of your gains. If your investment
reaches the stop-loss price, a sale is automatically triggered locking
in your profits.
The best way for an investor to try and avoid
many of the most common investor myths is to have a solid investment
plan, which includes a detailed examination of your personal finance
goals, your time horizon, and an analysis of your investment risk
tolerance. A qualified personal financial advisor can help you develop
and implement this comprehensive investment plan.
American Express Financial Advisors Inc. Member
NASD. American Express Company is separate from American Express
Financial Advisors Inc. and is not a broker-dealer.
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