We talk a lot about best-practice financial ideas in this space, but here are four sayings you might hear that probably aren’t going to contribute to your long-term financial success.
Wait for a dip.
For many investors, their biggest fear is buying into the market and seeing the value drop a few percent in the next days and weeks. This is true even for investments like IRAs where the account most likely won’t be touched for decades. A lot of money has been lost over the years due to the opportunity cost of not buying into the market as early as possible and compounding over time — there’s no reason to wait. Retirees today seeing the S&P 500 at 4600 aren’t concerned if they bought in in the 1980s when it was at 350 vs. 400. They’re just glad they bought in.
Cash is king.
This is one of those old-fashioned aphorisms that has some truth to it but can be devastating to long-term financial performance. Cash can be comforting in the face of extreme market dislocations. Also, cash can be important if you’re extremely leveraged up or have unreliable or inconsistent employment income. Even so, cash is almost always a terrible “investment,” especially now, with low interest rates and relatively high inflation. Cash is a place to keep money that is likely to be needed soon, not to plan for the future. Absent a deflationary spiral, it’s hard to imagine an attractive (or even adequate) return on cash in the coming years.
Nobody ever lost money taking profits.
Closely related to “cash is king,” this sentiment has lost a lot of money in opportunity costs over the years. Let’s say you or your advisor carefully consider an investment choice and buy it. If it goes up 5 percent the next day, you might be inclined to sell it to lock in your gains. But then what will you do? Keep the proceeds in cash? Buy your second-best investment idea in that asset class? When stocks or funds consistently reach 52-week highs (or all-time highs!) it can be unsettling. But as long as GDP is rising, productivity growth remains positive, and inflation continues to tick up, the nominal value of a country’s equity market generally should consistently rise as time goes on. In such an environment, markets “should” be setting all-time highs relatively frequently.
Invest in what you know.
Investor Peter Lynch, legendary manager of Fidelity’s Magellan Fund between 1977 and 1990, popularized a style of investing focused on buying stocks associated with products you know and love. This certainly worked for Peter during the time he was active, but probably isn’t the best way to construct a diversified portfolio.
Closely related to the Lynch style of investing is the well-documented matter of home bias: Investors tend to prefer positions in their home countries or even smaller geographic regions. Academic research has demonstrated that the only “free lunch” in investing is diversification, meaning that diversification can reduce risk without reducing expected returns. Some professionals have been wildly successful with concentrated positions, but diversification is a good friend of typical investors. Your friends and neighbors who hit home runs with a single stock in their portfolio are probably more lucky than good.
Gene Gard is Chief Investment Officer at Telarray, a Memphis-based wealth management firm that helps families navigate investment, tax, estate, and retirement decisions. Ask him your question at ggard@telarrayadvisors.com or sign up for the next free online seminar on the Events tab at telarrayadvisors.com.
