Fool me once, shame on you; fool me twice, shame on me. As investors, we’ve all been fooled into one foolish investment or another. Whether it was buying a “hot stock” via a recommendation from a friend or trying to time the stock market, we all fall victim to certain myths that unveil their ugly truths in teaching us hard lessons.
Our financial mis-behaviors often come from myths that we generally believe to be true. To help you prevent future foolish financial moves, Michael Chamberlain, CFP® shares the 5 most common myths his clients and investors alike fall victim to:
- “Dollar Cost Averaging increases your returns.” This may be the biggest surprise of them all, but the fact is, there is no evidence that validates this increases returns. Why? Because markets rise more often than they fall, so the earlier you have your money in the market, the greater return you will achieve.
- “Picking the right investment is the main factor to high returns.” We all want to think that we can pick the “right” investments, but the door has been slammed on this topic for a while. The primary driver in higher returns is your asset allocation.
- “I don’t need to worry about long-term care costs because Medicare will pay for it.” Another big myth according to Mr. Chamberlain. Medicare will pay for skilled nursing ONLY for a limited time. In fact, Medicare excludes many nursing care costs.
- “It’s always best to roll your 401(k) at retirement into an IRA.” This is generally a case by case basis, but so many investors feel that this is the default rule that it warrants being in the top 5. In many cases, your 401k plan can have better investment choices and lower fees than an IRA.
- “Actively managed mutual funds have higher returns than index funds.” There is a reason Vanguard is one of the biggest mutual fund companies in the world. Their passive index funds are catching on faster than ever as investors seek lower fees (and often higher returns) from their passive index funds.