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Investors should be wary of believing market adages warns one financial adviser.1. “Never Confuse Brains with a Bull Market”
When stockmarkets are flying, making money feels easy, but it is important to realise that a good couple of months in equity returns does not make you Warren Buffett.
The converse, of course, is also true – “Never Confuse Stupidity With a Bear Market”!
2. “It’s not me, it’s the market”
With the best will in the world, we can all look back on some investment decisions that we have made in the past and realise that we were not as correct as we might have liked to have been if we were in full position of information that subsequently came to light.
Or, to put it another way, we were wrong. This is a difficult thing for investors to admit as it is an admittance of failure. However, it is essential that you examine your failures as well as your successes. Indeed, one probably learns more from less successful investments, provided one accepts them.
3. “I will wait until the share price recovers to what I paid”
Closely related to the last point is the reluctance to take a loss. Sometimes, the first cut is the cheapest. If the investment circumstances have changed, leaving funds tied up in a company that one suspects is going to underperform in the hope that the share price will recover rather than reinvest into something where the prospects are brighter seems a ludicrous approach.
4. “I don’t need the money for six months, I’ll stay invested”
If you know you are going to need to disinvest, the only thing you can say with any certainty is what the assets are worth now. Everything else is just speculation as there are so many variables that can affect asset values.
That is fine, as long as you have a suitable time frame, but an investment strategy based upon squealing to a halt at the edge of the cliff with ones wheels smoking carries, inevitably, a degree of risk that is simply inappropriate for most people
5. Higher Risk = Higher Return
This can be true, of course, but volatility works in two directions, not just upwards! In the event of a market sell off, higher risk portfolios and assets can suffer significant falls in value. This ties in, of course, with the point above about time frame.
For a 30 year old investor, looking at saving for his retirement, a higher risk portfolio might be entirely appropriate as the funds will not be required for (probably) 40 years. However, for someone just entering retirement, with no great capacity for loss, one would have to question how great a proportion of ones assets should be in a high risk environment.