The 3 Wall Street Voices and 9 Myths – Part 3

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

As a recap from Parts 1 & 2, 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 (#7 – #9)

Here are the final three of the nine investment myths that Wall Street wants you to believe:

Investment Myth No. 7

Diversification of assets will always protect your investment. Diversification is important but is overrated as a means of controlling risk. The reason? During catastrophic events, most assets become highly correlated, meaning they drop together. So diversification does very little to protect your portfolio.

Put simply, when one block is pulled out, the whole tower comes tumbling down. The success of a portfolio is not just the result of its holdings, but the quality of the underlying investment process. This process should include a healthy exit strategy and carefully set loss-control measures. There is no way to insulate yourself from risk through diversification alone.

Investment Myth No. 8

Time in the market reduces risk. Common market philosophy states that successful investing is accomplished by staying fully invested over the long term, to capture the market’s average return. However, the idea that holding an investment long enough will somehow reduce risk is greatly flawed.

Mathematical calculations show that the risk associated with wealth does not decline by extending your time horizon. Nobel Laureate Paul Samuelson probably said it best: The longer you hold an investment, the greater your chances are of suffering a crash or a series of crashes.

It is not a question of time in the market that will help you reach your financial goals, but a well-founded investment strategy that correlates with your future desires can help.

Investment Myth No. 9

The best strategy is to set it and forget it. Successful stock investing takes more than a single decision to buy a mutual fund or a basket of stocks. After all, the market environment changes over time, as do your personal needs. Doesn’t it make sense that your investment strategy needs to change, too? One way to consider navigating the stock market is to move with it.

If you’re standing still, eventually you will most likely get run over. The penalty for taking a passive approach to investing is most likely (at best) taking unnecessary risk, and probably (at worst) experiencing a devastating loss. The reward for taking an active approach can be the ability to control risk and gain steady profit.

As a wrap up to this 3-part series, please contact us if you would like assistance reviewing your plan. Also, please share with anyone you know who could benefit from talking with us.