Investment myths that could cost you money
Sometimes, investor beliefs turn out to be myths that may cause investing mistakes. Here are some of the more popular myths that may hold a grain of truth, but are probably best avoided.
A high yield means a high return
Whether you invest in bonds with the highest interest rate or stocks with the highest dividend yield, high yield typically comes with high risk. Consider the risk of a bond default or dividend cut, which typically lowers the price of the bond or stock, as well as the income. (Keep in mind that dividends may be increased, decreased or eliminated at any point without notice.)
The United States dollar will decline
No one has a good track record in forecasting currencies. Since we don’t know which way the United States dollar will move, basing portfolio decisions on such a specific prediction is risky. Keep in mind that many United States companies receive more than half of their profits from outside the country, so not all will be hurt by a declining United States dollar. So instead of avoiding United States investments because of an expectation for the United States dollar to decline, consider making them an appropriate part of your international investments.
The best investments have the lowest fees Fees matter, but returns after fees and taxes are what you keep. So consider whether the fees pay for something valuable, such as better liquidity, enhanced asset selection or improved diversification, though, keep in mind that diversification does not guarantee a profit or protect against loss. Don’t be misled into thinking that all low-fee investments provide high returns. You may pay higher fees to own bond or equity funds, but these fees are often more than justified by the benefits they provide to your portfolio.
You can’t be too diversified Owning many similar investments tend to increase the complexity of your portfolio without increasing the return or reducing the risk. If you own individual stocks and bonds, you should consider constructing your portfolio carefully to ensure adequate diversification. To start, each stock or bond should constitute no more than five per cent of your portfolio and they should be spread across a variety of industries. If you own mutual funds as well, you’ll need fewer to achieve adequate diversification, but you’ll want to own funds that complement each other.
Speak with your financial adviser to learn more about these and other myths that could keep you from meeting your long-term goals.
Note: In the Nov. 14 edition of the South Shore Breaker, The Edward Jones’ Financial Focus column written by Kevin Dorey titled “Questions to ask your financial adviser,” was incorrectly attributed as contributed.