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7 Investment Myths Crucial Investment Tips for Investment Success

Posted on March 11, 2011 by Thomas DeGrace

Here are some investment tips that tell the many investment myths about investing. These are the biggest seven I have seen over the years. Believing these myths is often what keeps investors from ever making any money.

Big Myth #1

Brokers or Other Investment Consultants Can Make You Money.

The best brokers in the business are not the ones who make their clients the most money; they are the ones who do the most trades. The fact is, brokerage firms don’t even measure a broker’s profitability per customer. If management of brokerage firms doesn’t hold brokers accountable for their customer’s account, there is no motivation to make money for their customers. Your broker is in no way qualified to manage a portfolio or pick stocks. If these guys were so good, they would be millionaires themselves and not still be working for someone else.

Investment banking for brokerage firms brings in loads of money. By putting favorable analysts’ ratings on companies that bring in offerings and secondary offerings, the brokerage firm collects a percentage of each deal. Analysts work very closely with investment bankers and will put a favorable rating on any stock that has ties to the company.

Of course, with every rule, there is an exception, and there are some good brokers out there. We are not here to bash brokers, just stating the facts that we think investors should be aware of. We apologize if we have offended anyone, but professional investors know we are right.

Big Myth #2

Investing in the Indexes is a Good Way to Invest.

I don’t know how many times I have heard some flowery commentator or investment consultant tell investors that buying indexes is a good way to invest. Most of these indexes are just the highest market cap stocks in a certain sector or that trade on certain exchanges. We all saw how both the NASDAQ and S&P 500 index crashed recently and left investors bleeding on the side of the road.

Big Myth #3

Only Invest At Certain Times

Lots of people will tell you to invest at certain times. These “certain times” can mean a variety of things. Some will say only invest when the economy is good or the world is stable. One myth you will hear a lot about is how good the markets do from November 1st to May 1st. The fact is, there are always going to be investment opportunities, no matter what the conditions are and also, the biggest money is made buying at the bottom and not at the top. Nobody ever makes any money trying to follow the market.

Big Myth #4

Buying Stocks at Their 52wk High

Even respectable people will tell you that it is logical that only stocks that hit their 52wk highs can hit their next 52wk highs and so on. Also, they say that most of the great companies are trading at their 52wk highs. However, if you are losing money on a stock it’s most likely that you bought it at the wrong time, that is when everybody wanted it.

Big Myth #5

Buying Stocks at Their 52wk Low

Almost always a stock will make headlines when it hits its 52wk low. For a stock to hit this point, either it or the economy is likely to be having problems. Buying at a 52wk low doesn’t ensure that you will have little risk. In fact, a strategy of purely buying at 52wk lows can make for a very volatile portfolio. Some stocks that are at this point will end up filling for chapter 11 bankruptcy. Without a sound fundamental analysis, this type of investing is very risky.

Big Myth #6

Ride Your Winners, Sell Your Losers

I don’t know what knucklehead came up with this originally, but it is about the stupidest thing I have ever heard. It seems to suggest you should not use any logic, rather, just keep selling until all you have is winners.

Big Myth #7

The More Diversified You Are, the More Likely you are to Make Consistent Money.

While some diversification is good, it is often easy to get carried away. Too much diversification can, in fact, be bad for you. You don’t need to hold hundreds of securities to be properly diversified. Nobel Prize winner William F. Sharpe published an article in 1972 on the effect of diversification on nonmarket risk.(“Risk, Market Sensitivity and Diversification,” Financial Analysts Journal, January/February 1972, pp. 74-79.) As the graph below shows, increasing the number of securities held does reduce your risk, but the reduction becomes negligible once the portfolio reaches 25 or 30 securities, spread across several industries. Indeed, the plot becomes asymptotic at the level of 35 holdings.