Every day of our lives, we make assumptions. We assume that the people we encounter regularly will behave in the manner to which we are accustomed. We assume that if we take care of our cars, they will get us to where we want to go. In fact, we need to make assumptions to bring order to our world. But in some parts of our life — such as investing — assumptions can prove dangerous.
Of course not all investment-related assumptions are bad. But here are a few that, at the least, may prove to be counter-productive:
—”Real estate will always increase in value.” Up until the 2008 financial crisis, which was caused, at least partially, by the “housing bubble,” most people would probably have said that real estate is always a good investment. But since then, were all more painfully aware that housing prices can rise and fall. That isn’t to say that real estate is always a bad investment — as a relatively small part of a diversified portfolio, it can be appropriate, depending on your goals and risk tolerance. But don’t expect endless gains, with no setbacks.
—”Gold will always glitter.” During periods of market volatility, investors often flee to gold, thereby driving its price up. But gold prices will fluctuate, sometimes greatly, and there are risks in all types of gold ownership, whether you’re investing in actual bars of gold or gold “futures” or the stocks of gold-mining companies.
—”I can avoid all risks by sticking with CDs.” It’s true that Certificates of Deposit (CDs) offer a degree of preservation of principal. But they’re not risk-free; their rates of return may be so low that they don’t even keep up with inflation, which means you could incur purchasing-power risk. Again, having CDs in your portfolio is not a bad thing, but you’ll only want to own those amounts that are suitable for your objectives.
—”The price of my investment has gone up — I must have made the right decision.” This assumption could also be made in reverse — that is, you might think that, since the price of your investment has dropped, you must have made the wrong choice. This type of thinking causes investors to hold on to some investments too long, in the hopes of recapturing early gains, or selling promising investments too soon, just to “cut their losses.” Don’t judge investments based on short-term performance; instead, look at fundamentals and long-term potential.
—”If I need long-term care, Medicare will cover it.” You may never need any type of long-term care, but if you do, be prepared for some big expenses. The national average per year for a private room in a nursing home is nearly $84,000, according to a recent survey by Genworth, a financial security company.
This cost, repeated over a period of years, could prove catastrophic to your financial security during your retirement. And, contrary to many people’s assumptions, Medicare may only pay a small percentage of long-term care costs. You can help yourself by consulting with a financial professional, who can provide you with strategies designed to help cope with long-term care costs.
You can’t avoid all assumptions when you’re investing. But by staying away from questionable ones, you may avoid being tripped up on the road toward your financial goals.
On another topic as we get set to wrap up the year, if you’ve been around long-time investors, you’ll probably hear them say, ruefully, “If only I had gotten in on the ground floor of such-and-such computer or social media company, I’d be rich today.” That may be true — but is it really relevant to anyone anymore? Do you have to be an early investor of a spectacular company to achieve investment success?
Not really. Those early investors of the “next big thing” couldn’t have fully anticipated the tremendous results enjoyed by those companies. But these investors all had one thing in common: They were ready, willing and able to look for good opportunities.
And that’s what you need to do, too. Of course, you may never snag the next big thing, but that’s not the point. If you’re going to be a successful investor, you need to be diligent in your search for new opportunities. And these opportunities don’t need to be brand-new to the financial markets — they can just be new to you.
For example, when you look at your investment portfolio, do you see the same types of investments? If you own mostly aggressive growth stocks, you have the possibility of gains — but, at the same time, you do risk taking losses, from which it may take years to recover.
On the other hand, if you’re “overloaded” with certificates of deposit (CDs) and Treasury bills, you may enjoy protection of principal but at the cost of growth potential, because these investments rarely offer much in the way of returns. In fact, they may not even keep up with inflation, which means that if you own too many of them, you will face purchasing-power risk. To avoid these problems, look for opportunities to broaden your holdings beyond just one or two asset classes.
Here’s another way to take advantage of opportunities: Don’t take a “time out” from investing.
When markets are down, people’s fears drive them to sell investments whose prices have declined — thereby immediately turning “paper” losses into real ones — rather than holding on to quality investment vehicles and waiting for the market to recover. But successful investors are often rewarded when they not only hold on to investments during declines but also increase their holdings by purchasing investments whose prices have fallen — or adding new shares to existing investments — thereby following the first rule of investing: Buy low.
When the market rises again, these investors should see the value of their new investments, or the shares of their existing ones, increase in value. (Keep in mind, though, that when investing in stocks, there are no guarantees; some stocks do lose value and may never recover.)
Instead of looking for that one great “hit” in the form of an early investment in a skyrocketing stock, you’re better off by seeking good opportunities in the form of new investments that can broaden your existing portfolio or by adding additional shares, at good prices, to your existing investments.
These moves are less glitzy and glamorous than getting in on the ground floor of the next big thing – but, in the long run, they may make you look pretty smart indeed.