Investing Myths

Because I've been a financial journalist for many years, family and friends often assume I have special knowledge of where the markets are going to go. They even ask if I have insights into specific companies. I don't. That I, or anyone, has long-term reliable investing information on these companies is a myth, one of many I've come across over the years.

Here are a few more. Avoid them as you consider a long-term investing plan.

Myth #1: Some People Are 'In the Know'
It's what screenwriter Budd Schulberg said about Hollywood: "nobody knows anything." To a certain extent, it's true of Wall Street.The best investment managers invest in many companies and spread their money across many funds and strategies. If they knew about a couple of companies that were virtually guaranteed to go up, they'd pour all their money into them. But they don't. At the end of the day, no one--not investment advisors, analysts, academics, not even journalists--can say with any degree of certainty which companies are going to go up. This is why experts spread the risk.

Myth #2: The TV Knows
OK, so maybe there aren't people who can guarantee which companies will go up, but we can get a pretty good idea of market direction from the talking heads on TV. Well, maybe. There are some very smart people talking about business and finance on a variety of programs. And that's the problem--they're talking to everybody. By the time they announce that they believe a certain sector is going up, their advice is built into the price. Everybody knows and you can't get an edge. Think of it this way: what kind of odds would you get betting on a football team in the fourth quarter that's up by 21 points with a minute left to play? Because that's what you're doing when you're taking a short-term bet on something everyone knows.

Myth #3: Guarantees Are Always Good
I knew a young woman who was being responsible and putting money in her 401k retirement plan. Quite rightly, she put her monthly contributions into a stock fund. But then something "terrible" happened: it went down one quarter. Not a huge amount, but she did lose money. She quickly panicked and moved everything into a guaranteed fund. Sound good? No, it's bad. In the long-term, the stock fund would've recovered and done well, far surpassing her low-yield choice. She said she slept better at night knowing that what she had was "guaranteed." But she was only exchanging one form of risk for another: the risk she won't have enough money at retirement. The moral of the story: you can't eliminate risk, only manage it.