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Investing Myths

| Leslie Kelly

1. Investing is complex- Investing should be simple. You should be able to explain your investment strategy in a couple of minutes in plain language. You can own virtually every public company and short-term bonds (roughly 10,000 securities)with low-cost asset funds.

2. It's important to follow your instincts – well, that’s actually one of the worst things you can do. Your instincts usually lead to losing strategies. When the market is up and rising, you want to get in (buy high) and when the market is low, you become afraid and want to sell (sell low) doing exactly the opposite of what you should be doing. Ignore your gut.

3. Buy good companies – many so-called “bad companies or value stocks” can be great investments. That’s why you need to have both “good” (growth) and “bad”(value) stocks in your investment portfolio.

4. Large dividend-paying stocks are safe – they are no more “safe” than any other large company. Your portfolio should be widely diversified, with small and large companies, domestic (US) and international stocks as well as a good allocation to short term bonds. An over-concentration in any one type of stock increases risk.

5. You should invest to have a good time – Some firms now allow 24-hour trading – for those who enjoy the euphoria. Frequent trading is exciting but real investing should be dull and boring. Again, owning the world’s markets with low-cost asset class funds and rebalancing your portfolio on a structured basis is a far better way to secure good long term results.

6. Hard work pays off – actually, it doesn’t. Doing your own research to try to identify the next Apple actually doesn’t pay off because, with today technology, everyone knows everything about every stock or bond. There is no possibility of having an edge over the others so don’t waste your time. The only information you could have that could possibly make a difference is inside information – information that is not yet public – and acting on that information is illegal.

7. Past performance matters – No, unfortunately, it does not. Past performance must tell you what happened in the future. Looking at the direction a stock or fund has moved in the past has no predictive value at all. The markets move randomly and it is virtually impossible to predict what will happen in the future given all the potential variables. What works best for the future is a globally diversified portfolio of low-cost mutual funds, rebalanced on a regular schedule as needed.


Connect with Leslie Kelly, CFP®, AIF® at lkelly@afadvisors.com

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