Two "Truths" That Prevent You From Investing Successfully

Mistaking these myths for facts could set you up for failure.

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There are plenty of investment strategies—perhaps some you’ve already tried—that just don’t work: Market timing doesn’t work. Nor should you follow fads, trust the media, rely on so-called experts or make big bets on blue-chip stocks or hot sectors.

None of these ideas works, yet many investors persist in relying on them. When one fails, they move to the next, believing (or merely hoping) it will pay off.

Why do investors do this? Because they believe in two basic truths:

  1. Stock prices rise and fall.
  2. The stock market is risky, volatile and unpredictable.

Do you agree with these statements? Let’s explore them.

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Basic Truth #1: Stock Prices Rise and Fall

Of course, literally speaking, this statement is true. But it’s misleading. That’s because the statement is incomplete; it’s not really accurate to say that stock prices “rise and fall.”

Oh, sure, on any given day, prices might rise or fall. But over long periods, it’s more accurate to say that prices in the overall stock market rise a lot but fall a little. In fact, when stock prices are rising, they rise a lot and for a long time. When prices fall, they fall a little and for a short period.

Here’s another way to put it: The market doesn’t simply go up one point and then down one point. Rather, it goes up two points, then down one point. Then it goes up four, down one; up three and down one. Sure, sometimes the down is larger than the previous up, but over long periods—15 years or more, according to Ibbotson Associates—the stock market has always produced net profits. That’s why it’s wrong to be upset when stock prices fall. Educated investors realize that the best time to invest is at the end of period of decline. In other words, while ordinary investors are upset about market declines, educated investors get excited about them!

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Basic Truth #2: The Stock Market Is Risky, Volatile and Unpredictable

Clearly the stock market is volatile. It’s also unpredictable. No one can say what will happen next. And that makes the stock market risky. It’s like driving a car blindfolded.

But does it really matter?

Think about the last time you invested money; whether you bought a stock, a bond, a mutual fund, some real estate, or added to your retirement account at work—whatever. Now let me ask you a question: When you invested that money, was it your intention to withdraw the money in just 30 days?

Of course not. Your plan, more likely, was to leave the money alone for years, maybe even decades. Yet that’s how investors—spurred by the media—view the market. They watch it day by day and (in the case of CNBC) moment by moment.

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Why You Mustn't Look

Looking often at your investments is likely to make you do the opposite of what you should do. If you see that prices are down, you’ll become upset and want to sell. If you see that prices are up, you’ll get excited and want to buy. You’ll be tempted to sell low and buy high. A study from Columbia University supports this point: It found that checking your retirement portfolio too often can indeed reduce your returns.

“History shows that the stock market is a relatively safe bet over the long term because it has typically grown,” says Michaela Pagel, assistant professor of finance and economics at Columbia University in New York City. “Investors would be wise to keep this in mind, because those who check their portfolios too often and are driven by daily or hourly fluctuations in the market may make decisions that have a negative impact on their long-term financial prospects.”

This is why you must stop paying attention to news about the stock market’s activity. The media report only what’s happening today, making you think today matters. I’ve never heard a news anchor say, “As of today, the stock market’s average annual return since 1926 is 10 percent.” Yet that information would be more useful to investors than reporting today’s results.

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The Truth About the Two Basic Truths

Now you know the truth: The two basic truths are really nothing more than common myths. And by mistaking these myths as truths, Americans set themselves up for investment failure.

Dismiss these concoctions and instead believe that the stock market produces profits over long periods. Instead of being afraid of investments, maybe you ought to get excited!

Ric Edelman is Founder and Executive Chairman of Edelman Financial Services, LLC, a Registered Investment Advisor, and an Investment Advisor Representative who offers advisory services through EFS and is a Registered Representative and Registered Principal of, and offers securities through, EF Legacy Securities, LLC, an affiliated broker/dealer, member FINRA/SIPC.

Excerpted from Rescue Your Money: How to Invest Your Money During These Tumultuous Times by Ric Edelman. Copyright ©2009, 2016 by Ric Edelman. Published by Simon & Schuster.

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