Myth 1: Investing is too risky.
Investing in the stock market - and, to a lesser extent, in the bond market - can be risky, especially if you don't know what you're doing! However, not investing in stocks and bonds can be just as risky.
For example, vehicles that most investors consider safe – like savings accounts, CDs, and fixed annuities – don’t keep up with inflation over long time periods. This makes it virtually impossible for most people to save enough in these types of accounts and investments to accomplish big financial goals like retirement.
For large financial goals that are years away, investors need to consider the growth potential of stocks. But, to reduce stock market risk, it's important to diversify stock holdings using vehicles like mutual funds and exchange-traded funds (ETFs) that follow sound investment strategies.
Myth 2: My advisor can help me pick the best investments.
Be leery of any advisor that suggests he or she can pick investments that will outperform the market. The investments recommended by many advisors carry high expenses and commissions that can lower your investment return, and an active trading strategy can lead to a higher tax bill.
If you would like help picking or managing investments, look for a fee-only advisor that doesn't make a living 'selling' investments. Fee-only advisors charge fees for advice, meaning that they don't have incentives to recommend an investment unless they believe it is the absolute best option for you.
Two organizations that represent fee-only advisors are the Garrett Planning Network (www.GarrettPlanningNetwork.com) and the National Association of Personal Financial Advisors (www.NAPFA.org).
Myth 3: Investment performance is the most important factor to help me reach my goal.
Investment performance is important, but you should place primary importance on the things you can control. The first thing you can control is the amount you save. Saving and investing more will increase the chance you'll reach your financial goal. Second, you should focus on controlling costs. Higher cost investments often underperform over time. And third, always follow a clearly defined investment strategy rather than basing your investment decisions on tips from friends or your hunches.
Myth 4: I need to be in a hedge fund to make money.
Hedge funds have three “highs” that make them unsuitable for most investors: high minimums, high costs, and a high failure rate. It’s not uncommon for the minimum investment to be $1M or more, and once in the investment you’ll often pay expenses of 2% per year plus 20% of profits. As far as the failure rate, a study by the European Central Bank found that some hedge fund strategies have annual failure rates of over 14% per year.
While it's not as sexy and exciting as a hedge fund, a diversified portfolio of low-cost mutual funds and ETFs that has a mix of stocks and bonds is best for most investors.
Myth 5: Smart investors buy gold.
Gold gets a lot of attention during times of market volatility. Gold doesn't pay dividends, so any potential return will be from 100% price appreciation. So for an investment in gold to be profitable, you have to buy it in advance of market volatility before the price has risen. And if the price of gold drops, you won't receive any dividends to help cushion the fall.
While gold can be a good short-term hedge, historically it’s been a horrible long-term investment and at times it has been much more volatile than the stock market. At most, gold is a short-term speculative investment and most people are fine without it.
Myth 6: I’m too young to start planning for retirement.
Actually, the earlier you start the better because your investments will have more time to compound and grow, making it much easier to reach your goal. If you wait too long, you might end up having to rely on Social Security and lower your ideal standard of living in retirement. So follow our motto: "invest early, invest often".
To learn more about our company - and find out how we are different from other financial advisors - call (210) 587-6433 or visit www.VannoyAdvisoryGroup.com.
