Five Investing Myths Debunked

Five Investing Myths Debunked
Think "buy and hold" is a golden rule? Think again.

By Lisa Lamotta | 12 February 2010

It's tough to start out in the investment world— you have every friend, cousin, or in-law putting in their two cents, often offering tidbits of advice that aren't reliable. And sometimes the age-old "truths" about the market don't make as much sense for the new investor as they might for those who have already built some wealth. Here's a look at some some common investment "rules" that are actually based on misconceptions.

MYTH: It's best to take a long-term view and not to be quick to cut your losses.

TRUTH: Buy and hold was a good strategy before the market became as volatile as it is today. These days, when even "powerhouse" companies can collapse overnight, it's better to watch your investments closely and pull out with your profits if your investments take a wrong turn. "Veteran traders learn that a loss of $1,000 generally is precluded by a loss of $100— which is why pros are often more disciplined when entering trades. They tend to utilize stop and stop-limit loss orders— often implementing them as trailing stops," says Bill Singer, a three-decade veteran of Wall Street and now a partner in the Securities Practice Group at the law firm Stark & Stark. He recommends buying only half of what you planned and to complete the purchase if the shares move up, but to hold off if they drop. Use stops and limits to establish entry positions, he says.

MYTH: Investing in my 401(k) is the same as putting part of my paycheck into a high yield savings account.

TRUTH: That couldn't be further from the truth. As many Baby Boomers have found out over the course of the last two years, 401(k) retirement plans aren't foolproof; many Americans lost all of their retirement "savings" when their 401(k) portfolio tanked. While a 401(k) or a Roth IRA are still great investment tools for retirement, they aren't the only way you should be saving your money; you should be putting a least a chunk of your money into an actual high-yield savings account that can be liquidated if you need it in an emergency (some smaller community banks are now offering savings accounts with interest rates as high as 4%— almost unheard of in this climate). Read Four Ways to Beat the Market for more on building wealth before retirement.

MYTH: Gold is the best investment in an unstable economy.

TRUTH: In an economic climate that is as unstable as the one we're currently facing it is nice to have a bit of a security blanket in your portfolio, but that blanket shouldn't be your whole portfolio, or even a large percentage of it. US Global Investors' Chief Investment Officer Frank Holmes recommends that an investment in gold only be about 5% to 10% of your portfolio. "I always tell people that you don't buy gold to get rich," he says. "Buy gold for the one you love and as 5% of your portfolio to balance out the volatility of the rest of the market". (Read what legendary investor George Soros really thinks of gold).

MYTH: Companies that pay a regular dividend are a safer investment than other stocks.

TRUTH: While getting a quarterly check in the mail can feel great, it doesn't mean that it's the best investment. A lot of dividend-paying stocks continue to pay out despite their ailing performance— costing your portfolio more money than those dividends pay out. It can also be a misstep if that company decides to drastically reduce that dividend or cut it altogether like many companies did during 2009. A change like that can be especially painful since many dividends historically count as 40% of a stock investor's total returns.

MYTH: The only way to invest is with a broker.

TRUTH: When your father was starting his investment journey the only way to invest in the stock market was through a broker who had access to up-to-the-minute stock prices and inside information about the companies. But the personal computer, and more so the Internet, changed all of that. "The internet age has altered the 'conventional wisdoms' of Wall Street," says Singer. "The broker used to be a very important person because there was no other way to get information about a stock". Now consumers have real-time or near real-time access to stock prices from finance sites such as Google (GOOG) and Yahoo (YHOO), and you have the ability to know just as much, if not more, about a company than a broker does, just by listening to company investor calls, reading documents on the SEC's EDGAR database, or reading [[the many hudreds of financial blogs and : normxxx]] financial news sites.

  M O R E…

Normxxx    
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