5 investing myths debunked
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5 investing myths debunked
Financial myths are everywhere, muddying the investment waters. Unfortunately for the investing public, the veracity of many financial facts comes down to personal preference, the data of the day and whom you ask.
It’s no wonder that people throw their hands up and say, “Forget it!” See if you believe whether these so-called truths are fact or fiction.
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All advisers are the same
The combination of complicated investment products and your life savings should put all investors on high alert.
“In the investment world, most people can do a lot of the same things. But the biggest (difference) is the suitability and fiduciary issue,” says Robert Laura, president of Synergos Financial Group in Brighton, Michigan.
In a nutshell, brokers are held to suitability standards for determining whether they can sell a particular investment to a client. They look at variables such as income, time horizon and risk tolerance.
Investment advisers who call themselves fiduciaries are held to a higher standard than simply suitability. Fiduciaries must legally act in the best interests of their clients.
Investors should feel 100 percent confident that their adviser has their best interests in mind and not the mortgage payment coming due at the end of the month.
That doesn’t mean that a fiduciary won’t make poor decisions or maybe even be out to swindle you. Bankrate’s article on finding a financial planner can help you sort out the various credentials. Be sure to get the answers to some important questions before hiring an adviser.
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Gold is the best investment
Any hint of bad news brings out the gold bugs. One can barely listen to a news or talk radio station without hearing commercials for investing in gold.
“A lot of them are selling to people’s fears and selling to their greed by overstating without necessarily telling the whole story,” says Michael Masiello, president of Masiello Retirement Solutions, a financial planning firm in Rochester, New York. “There is no question that physical tangible assets have some value in most clients’ portfolios.”
Many advisers do recommend that investors hold gold and other commodities in their portfolios because they typically tend to have a low correlation with other asset classes. For example, when the stock market is going up, the value of gold may be going down or doing nothing — or vice versa.
“There is nothing wrong with having a portion of your portfolio in hard assets, but if the world really ends or the dollar crashes, you’re not going to want gold. You’re going to want a gun,” says Laura.
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Bonds are always safe
Bonds can sometimes be thought of as the frumpier side of an investing portfolio, “steady-Eddies” that won’t deliver much return or pose much risk to principal.
Of course, the term does include products that span the gamut from U.S. Treasury securities to below-investment-grade corporate debt instruments, otherwise known as junk bonds.
“There is a difference between Vanguard high-yield corporate bond funds, where their average rating is double-B, and buying TIPS (Treasury inflation-protected securities),” says Laura.
Bankrate’s Investing Basics offers information about some different types of bonds.
Beyond credit rating, the maturity can be a risk as well. Long-term bonds are particularly vulnerable in a rising-rate environment, which drives prices of existing bonds down. If you’re invested in a bond fund, you could lose principal if interest rates go up.
“One-year CDs are averaging yields of 1 percent or less. So people are going into bond funds not realizing that inverse relationship between price and yield in a potentially rising interest rate environment. Next couple years out, it’s going to cost them principal,” says Laura.
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5-star funds guarantee good returns
A fund earns a five-star rating from mutual fund rating and consulting company Morningstar by spectacular past performance. And as all investors should know, past performance is no indication of future results.
“There is no evidence that superior performance persists. If you buy a top-performing fund, you have no better than a random chance that it will post above-average performance,” says Mary Ellen McCarthy, Ph.D., founder and principal of Responsible Investing of Brookline, Massachusetts.
If you’re in the market for an actively managed fund, start with the star rating. But don’t buy a fund based on the money it made other people last year.
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Aggressive funds are money losers
Avoiding aggressive investments may seem like the best way to minimize losses in a market downturn and keep your money safe, but it has hidden downsides.
“There are lots of risks out there in the marketplace, for instance inflation risk, tax risk to your purchasing power,” says Masiello.
Even though you may keep your principal whole, if you earn less than the inflation rate, the purchasing power of your money will be eroded.
“After tax if you earn 1.5 percent and you are in the 30 percent tax bracket, you really earned 1 percent. And if inflation is 3 percent, you’re really at minus 2 percent. True, you didn’t lose money. But you didn’t earn money and your purchasing power just got cut.”
Many aggressive investments will preserve the purchasing power of your money and add to your principal over time. Combined with a smart investing strategy and diverse investments, the risk will be minimized and, it is hoped, returns boosted.