Five Investing Myths Even the Pros Believe

In their latest book, Michael Edesess, Kwok L. Tsui, Carol Fabbri, and George Peacock focus on what investors need to watch and what myths they should not fall prey to.

To illustrate the dangers of the various investing myths that circulate even at the higher levels these days, the authors list just five such myths below:

Myth #1. You can beat the market.
No, you can’t beat the market because to “beat” something assumes 
that it has certain, established parameters and, strengths, and weaknesses, but you can’t beat that which is volatile, always shape-shifting, yet far bigger than you. Believing you can beat the market  is like believing you can win big in casinos. Sure, you can win money on one or two instances, but over the long term, the house always wins. To beat the market on a sustained basis you have to be able to predict what no one else can predict, and do it again and again and again. Nobody can do that consistently except by sheer luck.

Myth #2. You get what you pay for in the investment advice and management business.In some fields, the more you pay the better the product works -- not so with investment advice and management. Just like brand-name products can sell for a higher price and yet be of equal or even inferior quality to non-brand name products, you are often paying a markup for the name or the hype. And in that sense, the more you pay for investment advice and management the less your investments will grow – and they will grow a whole lot less (because a lot of your investment is just going to the people behind the name and hype, not into the marketplace where it has a chance to multiply).

Myth #3. You’ll increase your investment return by running a “sophisticated” asset allocation program. Almost all financial advisors run “asset allocation” programs for their clients. Most investors think that with such a fancy name, the program must do something equally fancy with math that increases your investment return. The problem is that no amount of fancy math can change the reality of investing and its chaotic nature, because math is about established facts where certain actions or equations have certain predictable outcomes. In short,there’s no real math – the allocation program has to be engineered so that it produces ideal-scenario (instead of realistic-scenario) results. It's essentially wishful thinking with a more legitimate name.

Myth #4. If they don’t get professional advice, most investors tend to buy at market tops and sell at market bottoms.The financial media have repeated again and again the results of “research” that supposedly shows that individual investors make persistent errors in judgment – about when to get in the market and when to get out. They claim that supposedly “uninformed” investors buy too high and sell too low. People tend to accept this as a fact but no one has actually verified through extensive detailed research whether this is true (nor do people consider that most times this supposed research is presented by those offering professional advice). There is actually a viable counter-argument that states that investors are likely to be a lot more conscious of how and where they invest their money when they are doing it themselves instead of having someone else manage their money for them. Wouldn’t you?

Myth #5. Wealthy and sophisticated investors get better investment results than ordinary investors.This follows that those with more financial resources and expensive advisors make far more money than others, but it is simply not true. Yes, the more money you put in, the more money you can potentially make, but that's just simple logic. By the same logic, the more you put in, the more you can potentially lose, and some of the worst investment results in the past decade have been in hedge funds and complicated derivatives bought by wealthy investors as well as institutional investors like pension funds. Not only were their results worse than those of “unsophisticated” investors, but in the case of hedge fund investments, they paid significantly higher fees (you know — for that “professional advice”) for even less returns.

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