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7 Investment Adages That Aren’t True

Some Wall Street pearls of wisdom aren’t so smart

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In the world of finance, as in life, we sometimes cling to beliefs that just aren’t true. Such beliefs are actually misbeliefs, and though they may seem obviously true, they can end up costing us dearly. Let’s examine some of the typically accepted misbeliefs and why they prove to be so costly.

1. People who feel good about their retirement finances have saved more than others.

That seems pretty self-evident, but I’ve found the opposite is true. I’ve had people who haven’t saved much at all ask me to confirm that they can retire soon. I’ve also had others who tell me they would never be able to retire who already had more than enough.

The optimists never learned to defer spending and feel that things will take care of themselves, so they don’t have enough money to retire. Pessimists (like me) are afraid of ending up living under a bridge and get joy and comfort from saving. They have the money to retire, but don’t.

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2. Buying stuff makes you happy.

Did your neighbor just get that expensive luxury car you’ve been longing for? Don’t be envious. That new car may make him happy for the first few weeks, but the joy will begin to wane once the insurance and registration bills roll in, or he gets the first ding on his door. Free yourself from the lure of shiny objects. Say goodbye to keeping up with your neighbors and accumulating stuff. Instead, consider spending that money on experiences that will bring priceless memories, such as a trip with the grandkids. Research indicates that is far more likely to bring lasting happiness.

3. Disclosing conflicts of interests protects the public.

It turns out that making financial advisers disclose that they are not obligated to act in the best interests of their clients may not be a good thing either. This is according to research on “moral licensing” led by George Loewenstein of Carnegie Mellon University.

He demonstrated that disclosing a conflict of interest can undermine a financial adviser’s motivation to adhere to professional standards. Experimental research suggests that after engaging in moral behavior (for example, disclosing a potential conflict) people feel “licensed” to act immorally in subsequent interactions. Ironically, the consumer may also end up trusting the adviser more since he was honest enough to make such a disclosure

4. Good companies make good investments.

Good companies are generally growth companies that are profitable and growing fast. Bad companies are value companies with lower profits or with losses and not growing much. Financial markets, of course, already value the good companies at many times the bad companies’ value, so they cost more to buy. For many decades, value companies had far greater returns than the growth companies. That has changed over the past 15 years. I own the good, the bad and even the ugly companies through a total stock index fund, which owns all the stocks in a broad-based index.

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5. Risk and reward are always correlated.

It’s true that it’s hard to get higher returns with low risk but it’s not impossible. For example, moving your cash from a low-interest bank account to a high-yielding bank money market account will give you more interest with no additional risk.

But taking risk is no guarantee of a good return. You can take lots of risk and get a low or even a negative expected return. It may surprise you that, in the aggregate, not a penny has ever been made in either the commodities futures market or in the stock options market. That’s even before costs, so after costs, it’s a money loser. It’s not much different than betting on a football game through a sports app.

6. Economic analysis aids in investing.

It certainly makes sense that someone doing analysis of a company, industry and even the overall economy should have a leg up over those that don’t. Yet it turns out that this just isn’t so.

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As an example, much of the mutual fund industry is based on spending billions on this economic analysis. However, the vast majority of these fund managers underperform the index they are trying to beat, according to S&P Dow Jones Indices. And if you are investing based on news you’ve read or seen in a video, you are too late.

7. Financial advisers provide discipline not to chase performance.

Investors as a whole underperform the market by buying after the investment has surged. I call that performance-chasing and Morningstar estimates that this cost investors about 1.68 percent annually over the past decade.

While true that a good financial adviser can add value by disciplined investing and buying when markets are down, there is evidence just the opposite is true. Advisers ran to cash at just the wrong time during the financial crisis.

A recent Wall Street Journal article entitled “Who You Calling Dumb Money? Everyday Investors Do Just Fine” revealed that individual investors are much better than many money managers. The article showed “Many jumped into stocks in March 2020 when the market plunged at the onset of the Covid-19 pandemic, and rode the high as shares rebounded.”

When it comes to financial matters, it’s not what we don’t know that costs us the most; it’s what we think we know that isn’t true. Never blindly accept any financial belief if it’s important to your financial future. Misbeliefs can be costly. 

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