In conducting financial classes and presentations on benefits, I run into recurring misconceptions about investment management. A good chunk of time during and after these sessions goes toward breaking down these misconceptions.
Many people who consider themselves “savvy investors” cling to at least some of the items listed below. This list is by no means complete; keep up with finance news from MOAA for further guidance.
1. Don’t chase trends or time markets. There is no need to trade within your portfolio as a normal course of events. Don’t exhaust yourself chasing the next hot stock tip based on rumors or even financial news reports; this kind of trading is a losing proposition over time.
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2. Play the long game. The trading mentality leads people to think investing is a short-term game. It’s not. It’s based on a lifetime of work, having a plan, and patience. There are no shortcuts or get-rich-quick schemes.
3. Keep it simple. The knowledge and processes required behind successful investing are not that complicated – certainly not as complicated as financial service firms would lead you to believe. Do your research, and find a good adviser to help build a solid plan and help you stay the course.
4. Manage your managers. You can’t always stick with a good mutual fund manager. Managers may change jobs or retire, or their strategy may fall apart if economic conditions change. Some oversight on your part is always required to keep your original game plan on track. Using index funds eliminates this issue from your efforts.
5. See through the sales pitches. Most financial advisers are salespeople, not advisers. A real adviser won’t have an agenda or a product to pitch; he or she will work with you based on your needs and goals to build a simple, effective financial plan. If you can’t fully understand a financial product being pitched by your adviser, or if you’re being offered an all-in-one solution lumping multiple needs together (investments, insurance, and so on), get clarity or simply walk away.
6. The system isn’t “rigged” ... The markets are not stacked against us, but it’s easy to understand how investors who play hunches (and get burned) might have that impression. Their misguided strategy drags them down, not a rigged market.
7. ... and neither is the news. Similar to the above, it’s easy to understand how emotional investors can blame world events and political maneuvering for failed investments. But bad news (and bad politics) have been around forever; for careful, disciplined investors, things work out in the long term.
8. Expect ups and downs. The presence of these short-term fluctuations is one of few guarantees in the financial-planning world you can actually count on. If you know ups and downs will happen, your strategy has to exploit them for your benefit. Plan accordingly.
[MULTIPART SERIES: Investing in a Pandemic]
Many smart, highly skilled individuals are led into actions that are not in their best interest because they are not able to identify questionable guidance. Hopefully, these tips will help you ask the right questions as part of your financial planning process.
Want more help? An adviser with fiduciary responsibilities can be trusted to guide you on a path to success. A good adviser can provide knowledge and experience, define an objective, develop a strategy, and add the discipline and support to achieve the objective.
Editor’s Note: The original version of this article was posted in May 2016. It has been updated.
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