5 Investing Statements That Make You Sound Stupid

AAA

Some people love to talk stocks, and some people love to laugh at those people when they try to sound smart and important but don't know what they're talking about. If you want to be a part of group No. 1 and avoid being the brunt of the jokes from group No. 2, you've come to the right place. This article will help you sound knowledgeable and wise while talking about the market. Here are five things you shouldn't say, why you shouldn't say them and what an experienced investor would have said instead.

Statement No. 1: "My investment in Company X is a sure thing."

Misconception: If a company is hot, you'll definitely see great returns by investing in it.

Explanation: No investment is a sure thing. Any company can have serious problems that are hidden from investors. Many big-name companies - Enron, WorldCom, Adelphia and Global Crossing, to name a few - have fallen. Even the most financially sound company with the best management could be struck by an uncontrollable disaster or a major change in the marketplace, such as a new competitor or a change in technology. Further, if you buy a stock when it's hot, it might be overvalued, which makes it harder to get a good return. To protect yourself from disaster, diversify your investments. This is particularly important if you choose to invest in individual stocks instead of or in addition to already-diversified mutual funds. To further improve your returns and reduce your risk when investing in individual stocks, learn how to identify companies that may not be glamorous, but that offer long-term value.(To learn about other "sure things" that went bad, read The Biggest Stock Scams of All Time.)

What an experienced investor would say: "I'm willing to bet that my investment in Company X will do great, but to be on the safe side I've only put 5% of my savings in it."

Statement No. 2: "I would never buy stocks now because the market is doing terribly."

Misconception: It's not a good idea to invest in something that is currently declining in price.

Explanation: If the stocks you're purchasing still have stable fundamentals, then their currently low prices are likely only a reflection of short-term investor fear. In this case, look at the stocks you're interested in as if they're on sale. Take advantage of their temporarily lower prices and buy up. But do your due diligence first to find out why a stock's price has been driven down. Make sure it's just market doldrums and not a more serious problem. Remember that the stock market is cyclical, and just because most people are panic selling doesn't mean you should, too. (To learn more read, What Are Fundamentals? and Buy When There's Blood In The Streets.)

What an experienced investor would say: "I'm getting great deals on stocks right now since the market is tanking. I'm going to love myself for this in a few years when things have turned around and stock prices have rebounded."

Statement No. 3: "I just hired a great new broker, and I'm sure to beat the market."

Misconception: Actively-managed investments do better than passively managed investments.

Explanation: Actively-managed portfolios tend to underperform the market for several reasons. Here are three important ones:
  1. Whenever you make a trade, you must pay a commission. Even most online discount brokerage companies charge a fee of at least $5 per trade, and that's with you doing the work yourself. If you've hired an actual broker to do the work for you, your fees will be significantly higher and may also include advisory fees. These fees add up over time, eating into your returns.
  2. There is the risk that your broker might mismanage your portfolio. Brokers can pad their own pockets by engaging in excessive trading to increase commissions or choosing investments that aren't appropriate for your goals just to receive a company incentive or bonus. While this behavior is not ethical, it still happens.
  3. The odds are slim that you can find a broker who can actually beat the market consistently if you don't have a few hundred thousand dollars to manage.
Instead of hiring a broker who, because of the way the business is structured, may make decisions that aren't in your best interests, hire a fee-only financial planner. These planners don't make any money off of your investment decisions; they only receive an hourly fee for their expert advice. (To learn more, Understanding Dishonest Broker Tactics and Words From The Wise On Active Management.)

What an experienced investor would say: "Now that I've hired a fee-only financial planner, my net worth will increase since I'll have an unbiased professional helping me make sound investment decisions."

Statement No. 4: "My investments are well-diversified because I own a mutual fund that tracks the S&P 500."

Misconception: Investing in a lot of stocks makes you well-diversified.

Explanation: This isn't a bad start - owning shares of 500 stocks is better than owning just a few stocks. However, to have a truly diversified portfolio, you'll want to branch out into other asset classes, like bonds, treasuries, money market funds, international stock mutual funds or exchange traded funds (ETF). Since the S&P 500 stocks are all large-cap stocks, you can diversify even further and potentially boost your overall returns by investing in a small-cap index fund or ETF. Owning a mutual fund that holds several stocks helps diversify the stock portion of a portfolio, but owning securities in several asset classes helps diversify the complete portfolio. (To get started, read Diversification Beyond Equities and Diversification: It's All About (Asset) Class.)

What an experienced investor would say: "
I've diversified the stock component of my portfolio by buying an index fund that tracks the S&P 500, but that's just one component of my portfolio."

Statement No. 5: "I made $1,000 in the stock market today."

Misconception: You make money when your investments go up in value and you lose money when they go down.

Explanation: If your gain is only on paper, you haven't gained any money. Nothing is set in stone until you actually sell. That's yet another reason why you don't need to worry too much about cyclical declines in the stock market - if you hang onto your investments, there's a very good chance that they'll go up in value. And if you're a long-term investor, you'll have plenty of good opportunities over the years to sell at a profit. Better yet, if current tax law remains unchanged, you'll be taxed at a lower rate on the gains from your long-term investments, allowing you to keep more of your profit. Portfolio values fluctuate constantly but gains and losses are not realized until you act upon the fluctuations.

What an experienced investor would say: "The value of my portfolio went up $1,000 today - I guess it was a good day in the market, but it doesn't really affect me since I'm not selling anytime soon."

Conclusion

Conclusion
These misconceptions are so widespread that even your smartest friends and acquaintances are likely to reference at least one of them from time to time. They may even tell you you're wrong if you try to correct them. Of course, in the end, the most important thing when it comes to your investments isn't looking or sounding smart, but actually being smart. Avoid making the mistakes described in these five verbal blunders and you'll be on the right path to higher returns.
  1. No results found.
Related Articles
  1. Financial Advisor

    A Networking Cheat Sheet for Advisors

    Effective networking is essential for financial advisors looking to grow their practice. Here are some tips on how to make the process easier.
  2. Investing

    The Value Investor's Handbook

    Learn the technique that Buffett, Lynch and other pros used to make their fortunes.
  3. Financial Advisor

    Advisors: Here's the Fastest Way to Grow Your Firm

    The best way to grow your financial advisory business quickly is to amp up the 'know,' the 'like' and the 'trust' factors.
  4. Investing

    The Number One Reason Why Most Traders Fail

    We show you the simple tools, availble to everyone, to succeed as an active trader: education, experience, charts, vision, and risk management systems.
  5. Retirement

    4 Essential Steps to Take Before Retirement

    You owe it to yourself to head into retirement prepared. Here are four steps to help outline your best possible plan.
  6. Managing Wealth

    Tailoring Your Investment Plan

    Start your own investing adventure with the help of some simple guidelines.
  7. Investing

    Is Your Financial Well-Being Out of Your Control?

    Some parts of your financial well-being are out of your control, focus on the parts you can control.
  8. Financial Advisor

    10 Things to Do Before You Retire

    Preparing for retirement isn't all about finances. Some steps to get you there will be more subjective, and more fun.
Hot Definitions
  1. Restricted Stock Unit

    Compensation offered by an employer to an employee in the form of company stock. The employee does not receive the stock ...
  2. Operating Ratio

    A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Calculated as:
  3. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  4. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  5. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  6. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
Trading Center