When preparing for retirement, one of the main concerns is investing. However, not all individuals are pro investors and some even have misguided or totally wrong notions about investing. Below are some of the most common misconceptions to avoid if you’re looking to build your retirement nest egg:
Diversification is a Surefire Way to Eliminate Risk
This is among the most popular yet most misunderstood concept of investing, as most individuals believe that having a diversified investment portfolio would eliminate risk automatically. This isn’t always the case, though. In fact, virtually all funds that own stocks — even if those including the most varied stock index funds — would also go down if stock prices drop. Nevertheless, diversification could be an effective risk management tool, but you need to keep its limitations in mind.
Short-Term Results are the Greatest Performance Indicators
Not necessarily. In most cases, you will probably invest in something you can’t touch for a couple of years (perhaps even for decades), so selecting stocks, ETFs, or mutual funds solely on how they fared the past four months or year isn’t exactly sensible.
The worst-case scenario? You’ll be left with investments that were only popular, and probably overpriced, during the time you bought them. Instead, you should focus on reviewing the performance of an investment over its peers in the span of several cycles, including both dips and upswings, advises Shoreline Financial Advisors and other top financial advisors in CT.
More Risk Equals More Returns
This is simply untrue. While there are high-risk investments that pay off big time, some might provide average returns and others might not pay off at all. Put simply, only focusing on high-risk investments doesn’t automatically guarantee high returns. The truth of the matter is that aiming for oversized returns equal more risk, regardless if that risk is losing your principal or due to the volatility of the market.
When it comes to planning for retirement, you’ll definitely hear all sorts of advice, whether solicited or not. The main thing to remember is that you should do your own research and get professional help if you’re unsure of how to go about retirement planning.