I ran into an interesting blog last week that was sharing FIVE MYTHS about investing. For investors, a widely accepted but false belief can be harmful to long-term returns. Many of these misconceptions stem from our emotional responses. When markets move, our instincts often push us to act impulsively. Overconfidence creeps in, fear of missing out takes over, and we mistake correlation for causation. We're also tempted by promises of unrealistically high returns that rarely materialize. Most investors fall for these 5 myths-are you one of them?
MYTH #1: When there is a large drop in the stock market, get out Masterly Inactivity: A Strategy for STock Market Drops Panic selling during large market drops often leads to locking in significant losses. Instead, a strategy called "masterly inactivity"
—the art of knowing when not to act-can be more effective. This concept dates back to Roman history, where patience and restraint led to victory.
Looking at U.S. stock market history, the 10 worst one-day drops (1987, 1997, 2008, 2020) saw losses of up to 20%. However, by not reacting immediately, the market rebounded in 7 out of 10 cases within the next 10 days, with an average recovery of 5.5%.
Staying calm can often yield better long-term results than reacting impulsively.
MYTH #2: Confidence in your investing abilities leads to success Overconfidence and Excessive Trading: A Costly Mistake Emotions and behavioral biases often lead to underperformance in investing. One major bias is overconfidence, which leads to excessive trading. A study by Brad Barber and Terrence Odean found that highly active traders underperformed the market by 6.5% annually, despite overall market returns of 17.9%.
As Charley Ellis explained in his book Winning the Loser's Game, trying to "play like the pros" often backfires. Instead of chasing the market with frequent trades, a simple buy-and-hold approach with an index fund can be more effective in the long run.
MYTH #3: Once you’ve sold a stock and its price continues to rise, get back in The Dangers of FOMO in Investing Fear of missing out (FOMO) is one of the most damaging emotional reactions for investors, and it's been around for centuries. In 1720,
even Sir Isaac Newton fell victim to
FOMO, re-entering the South Sea stock near its peak after selling for a profit, only to lose millions. As Newton noted, "I can calculate the motion of heavenly bodies, but not the madness of people."
More recently, FOMO led many investors to losses in meme stocks
like GameStop. The lesson: once you sell a stock, don't look back-avoid the emotional trap of chasing missed gains
MYTH #4: Find what correlates with rising or falling stock prices and trade accordingly to the correlation Don't Be Fooled by Correlation: It Does Not Mean Causation Just because two events occur together doesn't mean one causes the other. A headline from 2021 claimed that Cristiano Ronaldo's
snub of Coca-Cola at a press conference caused the company's
market value to drop by $4 billion.
In reality, the stock fell due to a technicality on its ex-dividend date, not Ronaldo's actions
MYTH #5: If you’re offered a virtual risk-free return of over 10 percent per year, take it If It Sounds Too Good to Be True, It Probably Is
In 1999, New York Mets owner Fred Wilpon agreed to a deferred annuity for Bobby Bonilla with an 8% annual return, believing it was a safe bet.
After all, Wilpon's investments in Bernie Madoff's fund were yielding over 14% annually, seemingly risk-free. However, those returns turned out to be part of Madoff's infamous Ponzi scheme, one of the biggest financial frauds in history. The lesson? If an investment seems too good to be true, it likely is. Always be cautious of promises of high returns with no risk.
Source: Blog by Stephen Foerster (Co-author of book: In Pursuit of the Perfect) | 
