Investing can be one of the most interesting topics to study because there is such an extreme blend of factual information and subjective opinions. A company that one investor considers to be extremely undervalued, can be viewed by another investor as considerably overvalued — meanwhile, they could both be wrong and the company’s stock price could be trading at the correct valuation. As such, investing has become a breeding ground for misinformation, misconception, and myths. This article will debunk a few that might be beneficial for you to know:
It is common for people to believe that investing in stocks is riskier than it actually is. That is, if the investor is doing her/his own due diligence and making informed investment decisions. Furthermore, it is true that an investor could play the stock market similar to a casino game by making short-term, centralized, and high-risk investments in an effort to make money in the long run. However, such an investor should not be surprised when they end up with poor returns in the long-run — the same type a gambler might expect to have. Fortunately, historically speaking, investing is a “game” that can won in the long run. More specifically, investors can utilize strategies such as diversification and focusing on blue chip stocks. In fact, data suggests that using such strategies, investors can expect annual returns of more than 8% — over the span of many years. Conversely, an individual should not expect such returns from a casino over a long-term period.
Paying attention to a company’s past performance can be a very important tool when deciding whether, or not, it is a smart investment to make. Although, making assumptions about how a stock will perform in the future solely based off how it performed in the past is a dangerous method of thinking. For example, let’s look at a company that you are likely familiar with, JC Penny. While it once traded for $81.01 in on December 1, 2006, which was way up from $17.32 only three years prior, the stock now trades for only $3.69 (during the time I am writing this). It is clear to see through this example that an investor who saw JC Penny as undervalued in 2003 could have made huge returns in a short amount of time. However, that past performance was not an indication of future successes as individuals who decided to buy and hold past 2007 would have experienced significant losses.
There is a relatively common misconception that it is always beneficial to sell stocks on a seasonal basis because of “flat” periods. This theory is generally most popular during the summer months and some even refer to the expression, “sell in May and go away.” That said, this might not be a great idea because as an investor you could be opting out of opportunities. For instance, by selling during or leading up to the summer, an investor could miss two even three quarterly dividend payments. As such, the investor would be leaving money on the table if they had planned to purchase the same company’s stock and hold it over a considerable amount of time. Similarly, investors who sell seasonally also bare the risk of missing out on general gains. In fact, historically, even the most average summers have still been up over the past 50 years meaning that there is money to be made — in addition to dividends than can be collected.
Ultimately, since investing is an activity that allows for so many different strategies, which are based off individual’s personal preferences, there is a lot of misinformation that circulates. That said, as an informed investor who strives to made educated decisions with their money, it is important that you continue to do your own due diligence and avoid common investing ‘myths.’ In the end, though, it is important that you make the decisions with your money that feel the most right to you!