By now, you’ve probably figured out that the stock market today is not the same market as five years — or even one year — ago. Things change all the time, and the “can’t lose” advice that made some investors piles of cash a decade ago aren’t as guaranteed to have the same results today.
While some investors realize this and adjust their strategies accordingly, many still rely on the same tired and misguided advice. Then they wonder why they aren’t seeing the returns that they expected, or why they are experiencing losses. The truth is that there is so much misinformation out there that it can be hard to figure out what’s actually valid advice and what is actually outdated.
Need proof? If you’re planning an investment strategy, or trying to leverage the investments that you already have to improve your returns, think twice before you follow any of these outdated investment tips.
1. “Invest in Stocks Only — You’ll Have Greater Returns”
Standard practice when it comes to investing is that the younger you are, the more aggressive you can be with your investments. This assumes, of course, that you have plenty of time before you reach retirement age and can weather fluctuations in the market over time. Most advisers use the formula of 100 minus the client’s age to determine what percentage of the investment should be devoted to stocks, meaning that for most people, the maximum stock investment should be no more than 75 percent to 80 percent of your overall investment.
Still, some advisors recommend a portfolio made up entirely of stocks, claiming that it’s the only way to get the most return on your money. It’s also all but guaranteed to result in losses, since the market fluctuates daily. Putting some of your money into other investments including bonds and real estate provides some protection against those losses, especially as you get closer to retirement and will actually need the money.
2. “You Have to Time the Market Right”
Some experts argue that timing is everything when it comes to investing. In other words, you have to be ready to jump in when a stock is getting hot, and know when to sell it before it starts to decline. However, there are so many variables involved with market timing and not all of them are predictable. Trying to time your buying and trading activity perfectly is more likely to be a costly exercise in frustration than anything else.
Instead of trying to determine the right time to buy, a better strategy is to rely on trends. Looking at the performance of a particular stock over time is usually a better gauge of the potential for earnings; after all, even the “hottest” stocks will have down days, even during a generally upward trend. Trend investing is an easier strategy, and one that will earn you more dividends in the long run.
3. “Gold is a Sure Thing”
During a bear market, many experts advise people to invest in gold. After all, gold will always be valuable. The problem is that gold isn’t really an investment. Unlike stocks and bonds, which can earn you passive income in the form of dividends, the only way that you can make money from gold is if you sell it for more than you paid for it.
That’s great if you are in a pinch and need the cash, but once the gold is gone, it’s gone. You cannot make money on it again. In addition, when you buy gold, you need to find a place to store it and pay to insure it, so in effect, it could cost you money.
That’s not to say that you shouldn’t invest in gold at all. Rather than buying actual bars or coins, though, you can invest in a gold company, gold ETF, or invest in gold futures. When you do that, your investment will actually earn you money in the long term.
4. “Assume an 8 Percent Rate of Return”
Many investment and retirement calculators project potential earnings using an average or estimated rate of return. The problem is that you can never predict with any accuracy what your own rate of return will be, and the standard eight percent figure that’s been touted for years may be a bit on the high side. If you are trying to project your earnings, you’re better off to assuming a more conservative rate. You’ll avoid unpleasant surprises or disappointment.
Of course, before making any investment decision, you should speak with a qualified advisor who can help you make smart choices based on your own circumstances and goals. Keep in mind the outdated advice, and do your own homework to protect your wealth.