Your portfolio is more than just a collection of random stocks, mutual funds and ETFs. When constructed correctly, it becomes a tool that can lead to financial independence. It can transport you to faraway lands for months at a time, allow you to stop working years before your peers and secure your future so you worry less and enjoy life more.

3 Wrong Ideas from Wall Street

However when many people invest, they simply hand over their money to someone they don’t know or they invest based on information they’ve heard on television or seen on the Internet without being aware of what they’re doing, the risks they’re taking or whether they can do better.

And Wall Street firms are only too happy to keep investors in the dark with promises of untold wealth and how they have investors’ best interests at heart.

In reality, building solid wealth in the stock market requires you to learn the same basic fundamental techniques and principles the most successful investors use to create highly profitable, risk-minimized portfolios that run automatically over long periods of time.

Unfortunately you won’t get that from Wall Street. What you will get is confusing information about investing and what’s best for you. So without further ado, here are three wrong ideas from Wall Street that you absolutely need to look out for.

  1. Future performance will be the same as past performance. If you’re an investor you’ve probably seen the typical boilerplate disclaimer that states, “Past performance is no guarantee of future results.” And if you’re like most investors you’ve probably ignored it and bought into the well-written advertising prose implying that your future results will be just like those absurdly high past results.

    However you’d be well advised to ignore the hype and focus on the facts. It’s well known that funds given the coveted Morningstar five-star rating receive lots of new money from unwitting investors.

    But how is a five-star rating obtained? Well, it’s based primarily on past performance. And Morningstar itself released a study that found most five-star funds go on to underperform in the future.

    This is called chasing performance and is a huge mistake made by the majority of investors. Ensure you’re not one of them. When investing your hard-earned dollars, be sure you do so based on facts and the numbers, not on what a fund company or Wall Street “guru” tells you.

  2. Our services don’t cost you much. Really? Hidden fees cost you plenty. In fact Wall Street is very good at hiding fees. They hide trading costs, taxes, subscriptions to overpriced data and they disclose their management fees in teeny, tiny print where most people wouldn’t think to look.

    Before you throw your money at someone and abdicate the management of your financial well-being, think about whether that’s the best course of action for you and your family. Most of the time it’s not.

    Of course there are some people who have complex investing needs that may include complicated tax issues and such, so these people would do well to hire professionals (however these professionals will most likely come in the form of a good lawyer and accountant rather than an investment advisor).

    For just about everyone else, paying high fees to an advisor or mutual fund manager is just throwing money out the window. With a multitude of low-cost index funds and ETFs, there is no good reason to pay thousands of dollars annually (and hundreds of thousands, or even millions, over the life of your investments) to someone who on average will put you into investments that pay him or her the highest commissions at your expense.

    The bottom line is high fees almost always result in lower returns relative to a simple, inexpensive index fund. Typical advisors recommend investments that charge, mostly hidden, fees in the 2 to 3 percent range and most will recommend investments that pay them the highest commissions rather than investments that are best for you.

    There is a stark conflict of interest when advisors are compensated by fund companies. They have every incentive to recommend the funds paying them the highest fees and no incentive to recommend the least expensive index funds.

    However study after study shows that the funds with the highest fees underperform the inexpensive index funds. But advisors don’t make a good living recommending index funds, so you’ll mostly be sold expensive actively managed funds that will likely underperform.

    And just so you know, underperforming by 2 or 3 percent annually equates to an enormous amount of money when compounded over 25 or 30 years. For example, $50,000 invested for 30 years at 10% returns $872,470.11. However at 8% it returns just $503,132.84 (about $370,000 less). And at 7% the return is $380,612.75 (almost $500,000 less).

    So now you know. All those big high-rent buildings, fancy dinners and full-page ads in prestigious investment magazines are paid for with your dollars.

    You should not have to pay more than 1% annually and more likely you can get by nicely paying less than 0.5%

  3. Actively managed funds outperform passive funds because you have a professional money manager working for you. Although this sounds logical on the surface, it’s been proven to be absolutely false by just about every study that’s ever looked into it.

    More than 80% of funds whose managers try to outperform their benchmarks by either picking stocks or attempting to time the market fail to do so. Yet they typically charge the highest fees. So you pay high prices for sub-par performance. On the other hand, passive index fund investors generally outperform their actively managed counterparts and pay far less in fees.

    So before you buy into the active beats passive fallacy, do some research and see for yourself how much money you will be potentially throwing away following this piece of Wall Street advice.

It doesn’t take long or require much effort to grasp the basic insights of a sound investment strategy. Yet the payoff can be gigantic. So make some time to learn how to invest the right way and you’ll never have to rely on Wall Street “advice” again.

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