Wall Street has three voices it wants you to listen to and nine myths it wants you to believe. They are designed to allow “The Street” to keep making money from you. Exposing them will help you be a better investor.
In today’s volatile investment environment, you will hear three voices from The Street:
- One is the hysterical shouting of the panic-stricken, telling you to cash in all your investments and keep your money in a sock under your bed.
- A second is the comfortable pacification of the passive, urging you to wait out the long-haul with no changes to your portfolio.
- A third voice: the persuasive promise of the get-rich-quick crowd, whispering secret formulas guaranteed to line your pockets with gold.
Either way, Wall Street gets a cut.
You need to go beyond the voices, and listen to reason that may calm the panic, refute passivity and debunk so-called secret formulas.
Nine Wall Street Myths (#4 – #6)
Here are three of the nine investment myths that Wall Street wants you to believe:
Investment Myth No. 4
A good investment strategy focuses on gains. Too many investors enter the stock market concerned only with how much they can make, without understanding that avoiding significant loss is the real key to long-term confidence. Losses are inevitable if you invest in the stock market. But while some losses are a necessary part of a comprehensive investment process, you must avoid significant losses, even at the cost of missing out on possible gain.
Investing is a humbling process. It requires doing what’s necessary to align your assets with the market and, more importantly, correcting mistakes before they become significant losses. In the investment game, it’s not so much about being right, it’s about not being too wrong.
Investment Myth No. 5
To increase your return, increase your risk. From the beginning of time, people risked everything to cash in on gold mines, oil fields and the fountain of youth. Most of those folks risked everything, and lost everything. Despite the occasional overnight success story, avoiding volatility and exposure can typically enhance returns over the long term.
High-risk strategies (given enough time) almost always result in serious loss. Most fortunes are built by consistent application of a process grounded in sound risk management.
Investment Myth No. 6
Historical averages will eventually pay off. Passive investment practice dictates that, during steep market declines, you should stay focused on the long term because historical averages are a good indication of future returns. Just wait it out, and you will pocket a profit.
While understanding probabilities can make us better investors, recognize exactly what averages are: They contain the highest profits and the greatest losses ever experienced, and then even them all out into a fairly straight line. For that reason, averages mask volatility, and can mislead investors into thinking that the journey will be smooth and uneventful.
Instead, investors need to free themselves from thinking in terms of averages and recognize that they live in a world that is controlled by extremes. With that in mind, you are free to play the odds, but always be willing to do what’s necessary to avoid financial disaster.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.
Past performance is no guarantee of future results.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by FMeX.
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