A November 2015 survey on investment performance and risk revealed that many of us hold misguided or even wholly incorrect views on investing. TIAA-CREF’s survey included 1,000 investors and highlighted three glaring misconceptions:
Focus on the short-term
When choosing investments, 47 percent of respondents said the one-year return was their key decision criterion. Even more people (52 percent) said the quarterly or annual return were the most important time frame for evaluating an investment.Warren Buffet, one of the most successful investors in history, implores people to maintain a multi-decade time horizon. As such, it’s wise to analyze investments over 3-, 5- or 10-year time frames. In this case, many of the survey respondents are simply wrong.
Eliminate risk through diversification
Portfolio diversification is one of the tenants of investing, but it is not a golden ticket. Even the most diversified portfolio cannot eliminate risk entirely, however, a whopping 71 percent believed otherwise.Without a doubt, diversifying through several companies in differing industries, along with spreading funds across asset classes, is a great way to mitigate risk. This is how many funds operate. But everyone should know that any investment instrument owning stocks will decrease in value when prices nosedive.
More Risk Means More Reward
There is surely a relationship between risk and reward, but in no way does risk equal reward. Still, 53 percent of those polled thought higher risk GUARANTEED higher reward.Sure, some risky investments can net huge returns. But some generate just good or OK returns. And others yield mediocre or bad returns. And some even crash to zero.The truth is, those seeking higher returns will always have to deal with higher volatility or the risk of losing it all.
Clearly, we have a long way to go with financial education!