Common Myths of Investing from a Financial Advisor
Which would you prefer: $100 now or $125 a year from today? Gaining $25 on a $100 investment in one year means a 25% annual return. This return is higher than what the stock market usually offers. Yet studies show that many people choose the immediate $100 when posed with this scenario.
However, achieving long-term financial goals often requires growth-focused investing. Are your financial beliefs limiting your potential? Take a look at these widely believed myths and see if any resonate with you.
Myth #1: The stock market is too dangerous
Many people avoid investing in the stock market because they fear losing money. They often worry more about losses than about gains. This fear can prevent them from making the investments necessary to reach their financial goals.
The good news is there are strategies to help manage investment risks. One key approach is diversification.
If you invest all your money in one stock and the company fails, you'd lose everything. But by spreading your investments across multiple stocks, one company going under would only have a small impact. Diversifying across different types of assets, like bonds or short-term investments, can also lower your overall risk.
You don’t have to handpick individual stocks to benefit from the market, either. Mutual funds and exchange-traded funds (ETFs) let you invest in many companies. They come with professional management and built-in diversification.
It's important to remember that diversification and asset allocation can help manage risk. However, they do not guarantee profits or remove the chance of loss. That’s why it's crucial to create a portfolio that balances risk with your long-term financial goals.
The length of time you plan to hold your investments matters as well. Historically, the longer you stay invested in a diversified portfolio, the lower your risk of losing money permanently. Markets tend to recover over time, and if you avoid selling during downturns, your investments are more likely to bounce back.
Myth #2: Keeping money in a savings account is the safest option
Many people believe that holding cash is safe. Keeping too much money in cash or a low-interest savings account can reduce your buying power over time. This is due to inflation. As the cost of things like housing, food, and education rises, the value of your $100 today will likely buy less in five years.
Investing in assets that can earn returns higher than inflation helps you keep your purchasing power. Investing some of your savings in stocks can help your money grow over time. While stocks are riskier, they can offer potential rewards. You don’t need to aim for massive returns—consistent, moderate growth can be just as effective.
The key is finding a balanced mix of stable and higher-risk investments that you're comfortable with and can stick to over time.
Myth #3: Investing is too complex and time-consuming
While investing can seem overwhelming, it doesn't have to be. You can create and maintain a diversified portfolio by investing in mutual funds or exchange-traded funds (ETFs). Many people find that using a target date fund for retirement is an easier way to invest. Asset allocation funds can also help with other financial goals.
Both options provide professionally managed, diversified investments tailored to your needs. Target date funds become more conservative as you get closer to retirement. In contrast, asset allocation funds maintain a steady mix of stocks and other assets.
Another option is managed accounts, which offer professional guidance and can help keep your financial plans on track. Robo-advisors are a type of managed account. They give digital advice and tools. This approach is cheaper and requires less effort than traditional advisory services.
Myth #4: You need a large sum of money to begin investing
This was true in the past. Back then, placing a trade could cost $50. It also required working with a stockbroker. This made investing hard for many people.
Today, however, competition has significantly lowered the cost of investing. Many mutual funds no longer have minimum investment requirements, and ETFs provide another low-cost way to get started. At several financial institutions, you can begin investing with just a small amount of money.
Myth #5: I can wait for the perfect time to invest
Trying to perfectly time the market is extremely difficult, if not impossible. Instead of waiting for the ideal moment, it’s often better to start investing sooner. Delaying could mean missing out on valuable opportunities.
If you are unsure about investing a large amount at once, try dollar-cost averaging. This means investing a set amount regularly over time.
Research shows that lump-sum investing usually leads to higher returns. However, dollar-cost averaging can make the transition easier and lower risk. Remember that regular investment strategies, like dollar-cost averaging, do not guarantee profits. They also do not protect against losses in a falling market.
Ultimately, the best strategy is the one that gets you into the market and keeps you there. Missing just a few of the market’s best-performing days can significantly impact your long-term returns.
Myth #6: Investment advisors are only interested in selling products
Some people feel confident managing their own investments. Others prefer to choose professionally managed funds. Some may want the help of a financial advisor. However, uncertainty about who to trust in the financial industry can discourage many from seeking investment advice.
The good news is that there are various compensation models for financial professionals. Some people earn commissions by selling products or making trades. Others may charge hourly fees, flat fees, or a percentage of your investments. There are also other payment structures depending on the services provided.
No single payment model is right for everyone. The Securities and Exchange Commission (SEC) offers a detailed guide on evaluating investment professionals and questions you should ask.
It’s important to know how your advisor gets paid. You should also understand what you are charged. Their pay can affect the advice they give you. Don’t hesitate to ask for this information to ensure clarity and trust.
Bottom Line
Investing is within reach for everyone and can be a key factor in achieving your financial goals. You don’t need a lot of money, frequent trades, or complex strategies.
Focusing on the right mix of assets is important. Hold a variety of professionally managed investments. Rebalance your portfolio when needed. Resist the urge to make constant changes.
Stick to your plan over time to succeed. Whether you pick a managed account, a target date fund, or a mix of mutual funds, this steady approach can help lead to good results.
Sources:
https://www.fidelity.com/learning-center/personal-finance/myths-realities-stocks
Disclosures:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
This material is provided as a courtesy and for educational purposes only.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.
Rebalancing investing involves risk including loss of principal. No investment strategy, such as rebalancing, can guarantee a profit or protect against loss. Rebalancing investments may cause investors to incur transaction costs and, when rebalancing a non-retirement account, taxable events will be created that may increase your tax liability.
