Broker Check

Finance Myths and Mistakes pt. 2

May 16, 2023

Myth: Past performance guarantees future results. 

Very often we see this mindset in investing. The idea that, because an investment did well in the past, it has to do better in the future again. Emphasis again on has. While it is a common mindset we see, it just simply isn’t true. Just because an investment has done well in the past, that doesn’t guarantee anything at all going forward. 

However, one way to think about this is instead of saying it has to do well again in the future, it is more of a question of what made it perform well, and are those same pillars in place or is there a reason I believe in this investment. We see this a lot with market downturns. We’ve seen some really good companies get beat up in a down market. We have also seen some really bad companies get beat up in a down market. Both won’t and shouldn’t perform the same in the following bull market. Instead, you need to research different investments and outline why you believe in them, what are the factors in both their macro and micro market and environment, and what will these potentially lead to in the future. So while past performance does not guarantee future results, you can look and research past performance to form an idea on how you think the results will be in the future. 

Mistake: Neglecting to rebalance your portfolio. 

We see this mistake mostly with investors that have a set it and forget it mindset when it comes to investing. That mindset can be beneficial when avoiding noise and reaction to news or market movements. However, you can also find yourself in a situation where you aren’t rebalancing your portfolio. By not bringing your investments back to their original balance, you can find yourself in an investment that is far different than what your original intentions were. Keeping your portfolio rebalanced allows you to trim some winners for gains or to use those winners to bolster positions that have pulled back but you believe in long term. Ultimately, rebalancing your portfolio is essential to keeping your investments on track long term. 

Myth: Always invest in trending or “hot” stock. 

We see this mostly when it comes to chasing results and returns. It is easy to automatically think that if an investment has gone up 10% today and is making headlines, then it is going to continue to go up. The fear of missing out is the main psychological factor at play when making this type of investing decision. Ultimately, investing in the trending stock can lead you to a place of investing in a stock that’s value has been inflated because many people have fallen into the same trap of chasing the hot stock. It is always best to find an investment you might like, and even if it is trending, don’t jump in because you are afraid you’ll miss it or because everyone else is doing it. Take time, research, and decide if you think it is something that fits long term, or is it something you were caught up on because of the trend you were actively seeing.