Myth: All advisors are the same.
Fact: Nope. All advisors are not the same. Some get paid by commission and some get paid fees only. Some are brokers, while others are fiduciaries. It’s important for you to figure out which person really has your best interest at heart. If you feel even the slightest inkling of a sales pitch for some mutual fund or insurance product, RUN!
Myth: Mutual funds provide more safety than individual stocks.
Fact: Not necessarily. Yes, you should diversify, but you need to know what you own. A mutual fund’s performance is only as good as what’s in it. The stocks within a mutual fund can fluctuate just like single stocks. Besides, you can own a mutual fund that holds industry-specific stocks, and if that industry tanks, you would be taking a hit.
Myth: Bonds are always safe.
Fact: You can’t paint with such a broad brush. U.S. Treasuries will be a lot safer than risky junk bonds. You need to be aware that there are such things as low-investment-grade bonds. Also, there are definitely risks involved with bonds, including interest rate risk. You could lose your principal if interest rates go up. With a lot of experts expecting interest rates to rise, people buying into this myth will be burned by not understanding the dangers bonds can present.
Myth: Highly rated funds guarantee good returns.
Fact: A good five-year track record only tells you one thing: that you should’ve invested five years ago. There’s no evidence that superior performance can persist, and past performance is no indicator of future results. That’s not to say you should invest in one-star funds, far from it! But you shouldn’t invest based solely on a rating or past performance.
Myth: The stock market is just gambling.
Fact: Maybe if you went to your local library and did some research, you’d realize how stupid you sound. I personally believe that this “gambling” attitude stems from people being brainwashed into thinking that a share of stock is just something you trade. However, a share of stock represents ownership in a company. People often forget that. So when business conditions and outlooks change, the stock price fluctuates. Above all, you are investing in companies that will develop products, give us services, and make our lives better. In real gambling, no value is created because it’s just a zero-sum game.
Myth: Stocks that come down have to go back up again.
Fact: I wish! Value investing would be so much easier. Here’s the truth – great companies that do great stuff will see their stock prices continue to rise. The reverse of this is that crappy companies that consistently put out crap will remain crap.
Myth: Stocks that go up must come down.
Fact: Stocks that go up might come down, and they almost always come down in the short-term. But there’s no laws of physics in the stock market, so don’t expect some gravitational force to pull winners down to earth.
Myth: Dividend stocks won’t give me a big return.
Fact: Get real. There’s a stereotype that permeates amateur minds that dividend payers are big, stagnant and incapable of giving good returns. Check this out – Ned Davis Research found that between January 31st, 1972 and January 31st, 2013, companies that paid dividends had an annualized rate of return of nearly 10%. Stocks which didn’t pay a dividend barely paid 2%. Which side do you want to be on?
Myth: It’s a popular product, it must be a great investment!
Fact: Remember Heelys? They were extremely popular, but the stock flopped just as quickly as the popularity died off. Companies like Tesla, Netflix and Facebook are super popular with the public right now. What does the future have in store for them?
Myth: Stocks outperform over the long term.
Fact: This one doesn’t have to be a myth as long as you know what constitutes “long term”. In the long term, we’re all dead anyway.