Bubble gum doesn't take seven years to digest. Swimming immediately after eating won't guarantee you cramps. And despite how warm you might feel when imbibing at happy hour, drinking alcohol actually drops your core body temperature.
Whether you call them myths, wives' tales, or something else entirely, such falsehoods are generally harmless. When it comes to investing, though, these myths can be costly and could lead you to take on too much risk or not enough -- or even to avoid investing altogether.
Love it or hate it, investing remains one of the best ways to reach your financial goals and build a substantial retirement income. So before you needlessly jump ship or make an ill-advised decision, allow us to debunk three of the most common investing myths.
1. Investing is just like gambling
Some investors approach retirement planning as if they were in Las Vegas – looking to make some easy money, but quick to pull out if they hit a losing streak. Despite a couple of similarities, the differences between the two are far greater:
- Investing involves a logical and systematic approach (at least, it should), whereas gambling is usually based on emotion and luck.
- Gambling seeks immediate results, while investing relies upon a long-term strategy for a delayed benefit -- whether saving for retirement, paying for your kid's college, or making a large purchase.
- Gambling is risky, but a well-diversified investment portfolio should actually minimize your risk exposure.
Following a sound, long-term investing strategy will help you avoid the emotional, short-term mind-set associated with gambling. Remember, slow and steady wins the race -- especially when it comes to investing.
2. Risk is bad
The word "risk" might conjure up images of bungee jumpers or skydivers. But when it comes to investing and planning for retirement, risk takes on a very different meaning.
The truth is that risk is inherent to investing. As many investors have learned the hard way, an investment offering unusually high returns, such as rapid growth or rich dividends, comes with higher risks. Conversely, if you find an investment with almost no risk, its return is likely to be very low. At the end of the day, however, an investor who avoids risk entirely stands little chance of achieving inflation-beating returns, let alone providing a nest egg large enough to fund 20-plus years of retirement.
Instead of circumventing risk entirely, figure out what level of risk you are comfortable with. This is all about knowing yourself as an investor. Your risk tolerance -- i.e., your ability to stomach investment losses -- should take into consideration your goals, your time horizon for each goal, additional financial assets, the stability of your job, and more.
You can start to determine your investor type with this quiz. Consider consulting an investment advisor for a more in-depth analysis of your feelings about risk.
3. All advisors are the same
While it's true that professionals in the financial services industry can perform many of the same tasks, not all investment advisors are required to put your best interests ahead of their own. The biggest difference is the standard to which they're held -- either "fiduciary" or "suitability."
Those working for a Registered Investment Adviser are legally required to put your best interests first, which is known as the fiduciary standard. Others working in financial services, such as broker-dealers, are merely required to meet what's known as the suitability standard, meaning they can recommend any product so long as they find it "suitable" for the client's personal situation and needs. It also means their loyalty to themselves and their employers may conflict with their loyalty to their clients.
To figure out whether your advisor is worthy of your trust, make sure you ask the following:
- How he/she gets paid: We recommend working with a fee-only advisor who does not receive payment based on number of transactions or incentives from fund companies. You don't want to fall victim to "churning," or excessive trading on the part of a broker-dealer intended to generate commissions.
- Where your money is kept: It's a bad sign if your advisor insists on being the custodian of your assets. Rather, you want your advisor to use a third-party custodian (such as Charles Schwab & Co.,) to safeguard your funds.
- Why they recommend a particular investment: Is this recommendation based on unbiased research and analysis, or is it a result of your advisor's relationship with a particular fund manager or firm -- a clear conflict of interest?
It's easy to be tripped up or distracted by myths, especially as an investor. Remember, though, that saving alone is unlikely to get you to your goals. You'll be better positioned for success if you also have an appropriate investing strategy. By cutting through the noise and concentrating on what you really need to know, you'll be well on your way to having a plan that could help you achieve what you've always wanted.
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