The 3 Wall Street Voices and 9 Myths – Part 2

Understanding the myths and ignoring the voices can help you with investing choices

As a recap from Part 1, exposing the three voices and 9 myths of Wall Street may help you with investing choices.

The 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.

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 can be a real key to long-term success. Losses are inevitable if you invest in the stock market. But while some losses are a necessary part of a successful investment process, you probably will want to avoid significant losses, even at the cost of missing out on possible gain.

Investing according to your goals can be a humbling process. It typically involves 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 more 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 typically enhances returns over the long term.

High-risk strategies (given enough time) most likely result in serious loss. Many 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 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 should consider freeing 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 should be willing to do what’s necessary to avoid financial disaster.

Please contact us if you would like assistance reviewing your plan.