You may find that unsolicited advice is quite easy to come by, especially when it concerns personal finance. There are many circulating theories that might sound amazing as part of a bank's marketing campaign, but are in reality irrelevant to your circumstances. Here, we'll look at five of the most common investing myths and their corresponding non-fiction.
Myth 1: Investing is complicated
This is probably the most influential myth, although it needs a slight adjustment. Investing will be as complicated as you choose to make it. Investing, perhaps surprisingly, can also be as simple as you want to make it.
If you want to spend time, money, and energy researching stocks, layering on complex derivatives, and paying for esoteric alternative investments, there are plenty of people in the world who will be happy to do business with you.
But the reality is almost laughably simple: You can perform as well or better than most active investors by simply holding passive low-cost index funds.
Myth 2: You should hire someone to manage your money
If you have millions of dollars and require legal help to figure out how to minimize your estate tax, you might consider outsourcing that type of work. But for the significant majority of people who simply want to be invested for the long term and pay no further attention, you can learn to invest money on your own.
As we've explored in the past, a 1% or 2% fee on your invested assets can have the effect of eating a significant part of your after-tax return and add a decade or two to your working life.
Note that if you do need intermittent advice, that is also perfectly reasonable. For tax questions, make sure you've hired a seasoned CPA, and for financial planning, look for a fee-only financial planner that is a fiduciary at all times. This means that the planner is obligated -- by ethical and legal codes -- to act only in your best interests.
Myth 3: The stock market is for rich people only
Most traditional advisors may mandate substantial asset levels or expensive commitment fees before they'll even consider doing business with you, so many people might feel that financial advice is out of reach.
Most of the discount brokers (think Vanguard, Fidelity, and Schwab) allow you to open a brokerage account on your phone with no human assistance.
Literally anyone has the ability to open an account and invest in an S&P 500 index fund. Today, right now. And while this advice might sound overly simplistic, it alone can leave people far better off than if they had never invested.
Myth 4: It's not the right time to buy
If you're trying to trade in and out of the market, you'll quickly see that for most, it's an exercise in futility. But if you're trying to create a sustainable financial plan, you are better off investing long-term money immediately, as opposed to "waiting for a crash."
The reality is that you don't know when or if the market will correct, and it may very well grind higher for years before it does. Along that timeline, uninvested money has missed out on growth and dividends, and has also failed to qualify for long-term capital gains treatment.
First, devise an appropriate asset allocation. From there, it's advisable to invest long-term money as soon as possible and keep short-term money in cash.
Myth 5: You need more funds to have a diversified portfolio
Holding as many ETFs and mutual funds as you can get your hands on is more likely to confuse you than improve your returns. With the advent of total market funds, like the Vanguard Total Stock Market Index Fund (VTSAX -0.21%) and FTSE All-World ex-U.S. Index Fund (VFWAX 0.24%), you can cover the world's stock indices with just two funds.
Owning many different mutual funds tends to be administratively tedious and difficult to analyze. If you have 100 different funds covering 100 different micro-sectors, rebalancing will be a nightmare.
Keep holdings to a relative minimum so it's easier to see what's going on within your portfolio. You'll lose no diversification benefit by reducing your holdings to a manageable number.
Don't let folktales run your financial life
The best defense against common investing myths is financial education. If we have a shared understanding of the facts around sensible investing, we can combat misconceptions more easily. Take the first quarter of this year to recommit to basic investment principles that will stand up regardless of what's happening in the market.