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By Pamela Murphy - April 24, 2018
Investors can hear advice from a variety of sources—not just the financial professionals they have chosen to work with. Friends, family, the media, and even questionable web sources can provide what might sound like wise counsel, but could actually hurt your chances of achieving your investing goals. Below are six investing "words of wisdom" that have been around for a while. You may stumble upon them and wonder whether they have merit. Let's set the record straight.
The Truth: This financial adage encourages investors to sell their stocks in the spring to avoid a period of market decline. With this strategy, an investor sells stocks in May and reinvests in November, after a historically volatile period. The catchphrase dates back centuries when London bankers and merchants spent summer months in the country.
There is some basis for the historic market drop period. Since 1950, the Dow Jones Industrial Average has had an average return of 0.3 percent from May to October, compared to 7.5 percent from November to April.1 However, there can be some real disadvantages to this type of market timing.
We advocate a long-term view of investing instead and believe there is success from time in the market, rather than timing it. As I mentioned earlier, buying when stock prices are lower may position you for better returns when they start moving higher. In addition, selling investments can result in tax implications, or transaction fees if you work with an advisor.
The Truth: Nothing could be further from the truth, but it's understandable. Watching markets plummet can be scary and the uncertainty of volatile markets can make you want to pull your money out and stash it under the mattress. This, unfortunately, is a mistake many investors make.
It sounds counterintuitive but buying when markets are falling can be a smart investing strategy. Plus, if you pull your money when markets are falling, you could experience a loss. It's better to follow these strategies:
The Truth: This may sound like a good idea, especially if you don't like a lot of risk or you're newer to investing. But you also may not get the returns you want and potentially jeopardize your investing goals with a bond-only portfolio. A variety of investments are necessary for a well-balanced portfolio, and each investment type has its place.
Stocks and bonds can work in harmony: stocks potentially offer long-term growth opportunities, while bonds may offer a more immediate income stream. It's true that stocks are generally riskier than bonds, but it also may mean missing out on potential growth in your portfolio.
A bond-only portfolio may also put your future purchasing power at risk because of inflation. There are several approaches to help you combat inflation risks, but all start with the diversified approach I mentioned above. That means you include a healthy mix of stocks and bonds, the amount of each depends on your individual goals and how you feel about risk, and inflation-hedging investments, such as a single, comprehensive inflation protection investment.
The Truth: Whether you seek guidance from a professional depends on your investing needs, how much you want to be in control and how much you trust your investment decisions. In the age of do-it-yourself financial websites and applications, many circumvent a financial professional altogether. While someone with an economics or finance degree may be able to perform solo with success and certainty, we find that most clients are looking for help, even if it's to validate their decisions or their plan.
DIY investors who aren't familiar with sound investment strategies may run the risk of an under-diversified portfolio and misconceptions about the markets. Or they could miss out on comprehensive financial planning, a good sounding board or resources that can help them make more informed decisions.
The Truth: Needing multiple advisors is a misconception of diversification. Spreading your investments across multiple advisors does not guarantee that your investments will be diversified. It may just mean a variety of, maybe even conflicting, investing styles to understand, more paperwork and the added stress of keeping track of which advisor manages what.
For true diversification, you need a big picture view of all your assets. Consolidating your investments2 with one person or team of professionals from one firm has some noteworthy benefits, such as the ability to see where you may have overlap in investment types or potential gaps in your portfolio. Plus, it can take less time and make managing your investments more efficient.
The Truth: The January Effect is a stock market rally hypothesis that supposedly takes place after investors sell off in December to ease tax burdens and investors purchase them back at lower prices. While there is some historical credence to the year starting off with increased market activity—which some attribute to bonuses being invested or investors thinking the new year is a good time to get their financial house in order—the theory does not always hold true. For example, January 2016 saw one of the worst first quarter's in market history. I believe it's better to stick to your own financial plan rather than try to take advantage of events that may or may not happen.
While investing wisdom can come from multiple sources, sticking with professionals you know and trust—and who also have a proven track record—is likely the best place to seek guidance.
Contact us to learn how we can help you develop an investing plan.
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1 Sell in May and Go Away, Investopedia.com, May 2017
2 Consolidating investments may have potential consequences, such as taxes, penalties, charges or specific fees for liquidating or transferring your assets.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Diversification does not assure a profit nor does it protect against loss of principal.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.