The Facts and Fictions About Stock Investments
Individual investors can do well in the stock market. But investment specialists say they see the same mistakes made again and again. Here are some of the most common fallacies.
Myth: The stock market was up 26% last year. I’d better move some of my other investments over to stocks because they have the best returns.
Reality: That was then, this is now.
Stocks can be a key ingredient in a diversified portfolio. But don’t jump in until you’ve figured out your goals, made a realistic plan and budgeted accordingly.
Myth: If I pick a “conservative” stock or mutual fund, my money is safe.
Reality: If you want safe, go with a government-insured investment.
You can very likely achieve an attractive long-term rate of return in the stock market through diversification, education and a well-planned strategy that balances risks versus potential rewards. But a bet is still a bet.
Myth: Pick a stock or mutual fund that has had the best performance.
Reality: Past performance doesn’t necessarily indicate future performance.
“I hate to even tell people what a fund has done the past couple of years,” said Larry Beltramo, a financial planner at Regency Securities in Irvine. “I’m like, ‘Gosh, the last year doesn’t tell you anything.’ ”
In fact, it might lead you to buy at the peak. The goal of any investor should be to buy low and sell high--and that means trying to pick the next winner, not the last one.
Myth: I should avoid certain types of stocks or funds because they’ve been in the tank.
Reality: It might be just the time to buy.
Many investors have been avoiding international stocks, for instance, because U.S. equities have outperformed them. But investment specialists say that a well-balanced portfolio might need a smattering of foreign stocks, which could be poised to take off just as domestic issues decline.
Myth: My 401(k) account is guaranteed to appreciate.
Reality: Again, there are no guarantees.
Experts warn in particular against putting all your 401(k) eggs into one basket, such as your company’s stock.
Myth: If I invest in the stock market for the long term, I’ll do well.
Reality: It’s true that history tells us the stock market always bounces back. The question is, how long are you prepared to wait?
Some bear markets can last for years. If you’re planning to retire in five years, or even 10, you should plan much differently than if you intend to keep working for another 20 or 30 years.
Myth: If a stock declines, cut your losses and get out.
Reality: You might be missing a great buying opportunity if the company’s prospects haven’t changed dramatically. Again, the goal should be to buy low and sell high. Many people do just the opposite.
Myth: If I invest in several stocks or funds, or if I use a few different brokers, I’m sufficiently diversified.
Reality: Investors with several of the same types of investments are as vulnerable as a teenager with his first crush.
Being diversified means spreading your money around different asset classes--blue-chip stocks, growth stocks, international stocks, bonds and Treasury securities.
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