- There are many myths about successful investing, but it doesn’t have to be complicated.
- At Vanguard, we suggest tuning out the short-term noise and focusing on your long-term plan.
- We debunk some misconceptions about investing to help you maintain a long-term perspective.
The financial world can seem daunting, especially when there are no end of people offering trading tips and investment ideas. At Vanguard, we’ve long suggested that investors should tune out the short-term market noise and focus on their long-term investment plan.
There are a great deal of myths about what it takes to be a successful investor. In reality, you don’t need a degree in finance or complicated strategies to be a confident investor. It’s more important to be clear on your goals, have a balanced portfolio of shares and bonds, control your costs and take a disciplined, long-term approach to investing.
Here I break down four of the most common myths about investing and offer a different perspective for each of them.
Myth #1: The stock market is a game, and you need to pick “winners” to see results
When people learn I’m a financial adviser, they often ask me which shares they should buy. And they’re surprised when I reply, “All of them!” They may not realise it, but my three-word response is a short version of Vanguard’s time-tested investment principles: Use diversification to balance your risk.
When choosing investments, instead of trying to predict which individual shares or bonds will be winners, you can opt for a broad-market mutual fund or exchange-traded fund (ETF) and invest in thousands of them all at once. Evidence shows that most of the stock market return comes from a small number of shares1. However, picking those shares in advance is really hard. That is why buying them all has proven to be a successful strategy. Following a diversified approach also helps balance your risk, because economic conditions that cause one company’s shares to perform poorly may cause another to perform well.
Myth #2: You need to get in at the right time because the stock market is volatile
Nobody—not even financial professionals like me—knows for sure what the market will do.
That’s why investors often fare better when they don’t try to time the markets and keep their focus on the long term.
The chart below shows the short-term volatility of the market (the dark blue line), with prices moving around quite significantly over shorter time periods. However, over the longer term (as shown by the light green shaded area), markets have delivered steadier growth.
The most important thing to do is to look at the big picture. Are you still comfortable with your mix of investments? If so, it’s best to stay the course and keep a long-term perspective.
Keep your focus on the long term
Volatility and index prices of the MSCI AC World Index
Past performance is not a reliable indicator of future results.
Notes: The chart shows the trailing 30 business day volatility of daily returns (left-hand side) and the price index (right-hand side) of the MSCI World Price Index from 1 January 1982 to 31 December 1987 and the MSCI AC World Price Index thereafter.
Source: Vanguard calculations in GBP, based on data from Refinitiv, as at 5 July 2023.
Myth #3: You need to keep up with financial news
A friend recently asked me what I do when companies announce their earnings. Do I hold their shares? Or sell, and plan to buy again later? My response, as an investor, is, “I don’t do anything”. Market events, like a company announcing earnings or paying dividends, have little to no effect on my long-term investment goals, so they don’t affect my strategy. Your investment selection and portfolio strategy should be made based on your life and your investment goals, not on what’s happening in the markets day to day.
Familiarising yourself with some investing basics can help you put market events in perspective and may make you feel more comfortable as an investor. Keep in mind that a lot of what’s in the news is just noise and ignoring it doesn’t mean your returns will suffer. Instead of trying to adapt to what’s happening in the market at any given time, ask yourself, “What mix of investments am I comfortable having, given the time I have to reach my goal?” If you’re not sure, learning more about asset allocation and diversification can help you decide.
Myth #4: You need a lot of time to research shares and make frequent trades
Investing isn’t supposed to be flashy or exciting like a casino. The truth is, investing the right way is actually a little bit boring. Once you’ve put your investing strategy in place, there shouldn’t be a lot of day-to-day activity. You just need to check in periodically and make any adjustments needed to keep your plan on track. Alternatively, with our Managed ISA, we will pick, manage and monitor your investment portfolio for you.
Time spent researching stocks, making frequent trades and trying to time the market rarely has the return on investment some might expect. In fact, the odds are against you when it comes to market-timing. But while timing the market doesn’t produce returns, time in the market typically does.
1 Source: Vanguard Research: “How to increase the odds of owning the few stocks that drive returns”, February 2019, C. Tidmore, F. M. Kinniry, G. Renzi-Ricci; E. Cilla.
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