3 Myths About Investing - Part 3

As the third installment on our series on money and investing myths, we are going to discuss 3 additional facts that you may want to keep in mind on your quest for riches. If you wish to see the other myths outlined, please visit www.youtube.com/drboycefinance.

Myth #7) Building wealth involves a great deal of “know how” and expertise

Being a financial expert doesn’t necessarily hurt your chances of getting rich. But it doesn’t, by any means, guarantee that you are going to be better off than other people. Many of the greatest lessons I’ve learned about money management came from my grandmother, who never went to college and never earned more than $20,000 per year. She made a very simple statement, “If you are a spender, you will always be broke. If you are saver, you will always have money.” This taught me a great deal, as I found out that from my grandmother that the keys to money management exist within your psyche and your soul, not in the number of college degrees you have.

Understanding your personal relationship with money, as well as the reasons you over spend or under save can go a long way to developing your own personal path to financial fitness. Your financial freedom won’t be granted by a series of bells and whistles granted to you by financial experts. It will be provided by the use of good old fashioned discipline.

Myth #8) Buying stock in a good company means I’ve made a good investment

When I appear on radio shows or receive emails from those who support me, I am consistently asked if I can “recommend a good stock”. This is not a very good question, since a good company does not necessarily make for a good investment. Every financial asset has a price you should pay and the rules are simple: if you pay less than the asset’s value, you made a good investment. If your price is greater than the asset’s value, it’s a bad investment. So, a company with great profitability and solid cashflow can be a terrible investment for your portfolio. In fact, research shows that investors who purchase high flying “glamour” stocks are far worse off than those who purchase “value” stocks in companies that are financially distressed.

Myth #9) Mutual fund managers and stock brokers can predict the future

There is always a mad dash for the top performing mutual funds to get their names in the pages of leading financial publications. This is because they know that most investors tend to be “momentum traders”, meaning that they invest heavily in funds that did well in the past, expecting that these funds are going to do well in the future. While such assumptions certainly make sense, the problem is that they are simply fallacious. Financial research shows that mutual funds that did well the prior year usually have among the worst performance during the following year. At best, they are quite mediocre on average and there is very little connection between past performance and future performance.

Additionally, there an entire industry built around fund managers and stock brokers having the ability to convince investors that they can predict the future performance of a given stock or of the entire stock market itself. One such soothsayer, so good that he has a show on national television, was found to have horrible performance in the portfolios of stocks he recommended to his viewers. At the end of the day, you can’t predict the market and you can’t predict the performance of any particular stock. Even leading academic experts are virtually incapable of such a daunting task.

What we do know is quite simple. If you are a long-term investor with a well-diversified portfolio, then the following two facts remain true: 1) Your average return tends to be higher if you have higher risk. 2) Any losses you make on your portfolio in the short-term are typically recovered in the long term.

It’s really as simple as that.

Dr. Boyce Watkins is a Finance Professor at Syracuse University and author of “Financial Lovemaking 101: Merging Assets with your Partner in ways that Feel Good”. For more information, please visit www.DrBoyceFinance.com.