Five Investing Myths
Don’t let your emotions get in the way of investing performance
Myths can be endearing, like the legend of the Loch Ness Monster. But for investors, when a myth is a belief that is widely held and yet false, it can be deadly from an investment return perspective. Many myths are related to our emotions. For example, when something happens in the stock market, we instinctively want to take action. We are overconfident. We have a fear of missing out. We confuse correlation with causation. And we’re enticed by tantalizing — and yet unattainable — high expected returns.
These emotional biases aren’t new. Some of the five myths I discuss below date back centuries. They are exposed in my new book, Trailblazers, Heroes, and Crooks: Stories to Make You a Smarter Investor. By understanding and learning from history, we can avoid the mistakes that others have made.
Myth #1: When there is a large drop in the stock market, get out.
This is often the worst time to sell. Instead, a better strategy is known as “masterly inactivity,” or the art of knowing when not to act. It dates back to the Second Punic War (218–201 BCE), when Roman dictator Quintus Fabius defeated Carthaginian Hannibal Barca, one of the greatest military commanders in history. When Hannibal initially tried to engage Fabius in a battle, Fabius did nothing, biding…
