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There are four misconceptions about investing that can easily unravel even the best financial plans.
Many high-income earners fall prey to these misconceptions because they fit easily within the common, but errant, narrative about investing.
1. Easily the most damaging misconception is the focus on performance or outperformance. Yes, you want to earn good returns on your investments. However, a narrow view of performance, particularly over short periods of time, can lead to poor decisions. To avoid falling into the performance trap, think about the long-term planning outcome that you are trying to achieve and less about performance. Human nature has a way of pushing us towards a desire for “something for nothing” and when that happens, the investing mistakes start to pile up. Risk and return are related. Accept and embrace the returns provided by the markets and stay clear of the “performance derby.”
2. The next misconception is the belief that even with decades of market history, things are different today. Of course, this is the nearly constant refrain from the financial media. They repeat over and over that the confluence of political and financial “crises” has never before been experienced before now. This is demonstrably untrue. Pearl Harbor, JFK Assassination, Arab Oil Embargo, 1986 Market Crash, and The Gulf War are just a few of the very scary political and economic events over the past half-century. This time and current events are not different or unprecedented.
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3. Losing faith in the permanent market uptrend. This misconception is a cousin to # 2 and can cause affluent individuals to lose confidence in their financial future. There will always be uncertainty and plenty of charlatans make a living “stirring the pot” of anxiety. While there are no future facts, since 1926 there have been 913 overlapping 15 year time periods. The S&P 500 Index has been positive in 99.8% of those 15 year periods. Do not loose faith that the market will increase over time.
4. Thinking that you have to be able to predict the future in order to be a successful investor. This is the primary content in the pablum served up each day by Wall Street firms. They have hundreds of “analysts” that are all too willing to write complicated reports with lots of charts predicting something in the future. These typically prove to be wrong. Even with nine decades of market history, about 80% of stock market investments still broadly fall into the predictive category.