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Basic Misconceptions in Investing

Myths that need to be forgotten

For years, quite a few myths or misconceptions have been taught by most investment professionals that the investing public needs to understand better. These myths can work against the investor in certain situations.

Dollar Cost Averaging

The basic concept of Dollar Cost Averaging is investing a set amount of money every month for a period of time. As prices of shares fluctuate, the number of shares that this set amount of money can purchase varies. When shares are expensive, less shares will be bought and when shares are inexpensive, more of them will be bought.

The truth of the matter is that the investor is still buying every month, regardless of market conditions. If the market is in a strong down trend, the investor is still buying on the way down. If the market is forming a top, the investor is only adding more shares.

The reason for this myth is that most investors and investment professionals are not aware of very simple methods that can point market bottoms and market tops. If by using these simple methods that are detailed in these articles, an investor can only buy when the market goes up and only sell when the market comes down, they can improve their returns tremendously.

Diversification

The basic concept behind diversification is simple, by diversifying investments over many sectors, the investor can reach a certain stability. If one sector goes down, another sector will go up. This concept is great for achieving stability, but it can really hurt growth.

If one sector is going up and another sector is coming down, the average is not going anywhere. By investing in sectors that are going down and investing in sectors that are going up, the total portfolio is not really going anywhere. Diversification should be balanced with analysis. An investor should diversify among sectors, but only sectors that are going up.

Long Term - Buy & Hold

Most investment programs are based on buy & hold. Investing right now for the future. The investor is encouraged to invest various amounts of money right now and forget about them. Exits do not exist.

Our world changes very quickly. Buying now what one thinks is the best for years down the road is just a wild guess. Long term investments are usually short term investments that are not doing very well and people end up holding on to them instead of selling. Investments that are not being actively managed are long term gambles, not investments. An investor should water his flowers and pick out the weeds, care for his investments as if they were his garden. By selling or exiting investments that are going sour and investing more in successful investments, the performance of the portfolio is greatly enhanced.

Professional Help

We do believe in professionals and their ability to improve performance, but don't always agree with the way they operate. All too often, professionals are more concerned with their own profit rather than your profits. Investment professionals are trained to generate sales and not profits and more often than not, they are either not aware or don't put out the effort to do their research.

Investment myths are used by the industry to train the investor to not expect much. By lowering the bar and reducing expectations, the industry is able to profit without focusing on profitability.

No one will care about the investor portfolio's performance as much as the investor. By using common sense, recognizing common mistakes and learning basic concepts of trading, the average investor can greatly enhance their performance in all market conditions.

 

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