Welcome back for Part 3 of our 4 part series on the myths behind stock investing. We’ve already seen, and debunked, four myths that have been around for quite a long time, and hopefully these have given you an idea about why doing your own research, and forming your own opinions about stock investing, is so important. Today’s blog will hopefully do the same so let’s get going. Enjoy.
Myth #5: Losses on paper aren’t important.
Stocks are what is known as “liquid assets”, meaning that at any time they can be sold or liquidated throughout the trading day. Many investors rationalize that, when a stock’s price falls below its purchase price, they haven’t actually lost anything because the stock still hasn’t been sold. Since a stock is only worth what its currently trading at however, this line of thinking is incorrect.
The problem is that when the stock falls in value, the purchasing power behind it falls as well. If, for example, you had $10,000 in a specific stock and the price falls by 10%, you now have an investment that’s only worth $9000 and 10% less money to spend on whatever you are planning to purchase with that money. The damage here is twofold; the loss of purchasing power and the loss of value.
This isn’t to say that you should quickly sell your stocks whenever their price drops because, as you’ll find out, the market goes up and down like the tide and there will be times when you have losses. Even Warren Buffett, one of the most successful investors of all time, has seen losses during his investing career.
Holding onto a stock for the sole purpose of getting back to the break-even point isn’t recommended either however, but rather a re-examination of the company, and your reasons for investing in them to begin with. Ask yourself whether you would purchase their stock now, if you didn’t currently own it. The answer to that question will help your decision-making process.
Myth #6: You should purchase the stocks that are in being talked about by the news media
There are, to be sure, a plethora of news agencies reporting on the stock market every single day. Stocks that are making headlines are usually doing so because of an earnings release, an analyst upgrade or some type of new product announcement, and these headlines can sometimes create the false assumption that these stocks are being purchased or traded vigorously.
The fact is however that once a stock has made it to being featured on the news, the information about it has already been disseminated around the industry. There’s simply no way for an individual investor to react fast enough to beat a professional traders, making any reaction to daily stock headlines a losing proposition.
The good news is that, unlike a professional trader, you are not beholden to anyone for your performance and can hold onto stocks patiently. There’s no need to react to headlines and, even better, you can actually take as much time to analyze a stock, and the company behind it, to find a good entry price.
Since stocks with less trading volume tend to perform better (as shown by research from Yale professor Roger Ibbotson), they are likely to be undervalued, making any purchases based on headlines even more unadvisable.
That’s it for today’s blog. We hope these two new myths were eye-opening and provided you some valuable information about what you should, and shouldn’t, do when it comes to your own stock investing strategy. Make sure to come back and join us for our final blog in this 4 Part series very soon.