How True Are These Investing Cliches?
Investing can be daunting, with countless options and strategies out there. It’s no wonder why many investors opt for some time-proven investing cliches. But how true are these oft-repeated adages, and are they truly beneficial?
Dollar-Cost Averaging
The premise of “dollar-cost averaging” is to invest a fixed amount of cash at regular intervals, regardless of the market’s ups and downs. While this strategy can help ease the anxiety of investing, studies find that it falls short of the benefits of lump-sum investing in the long run. Lump-sum investing can benefit those who have a long-term investment horizon and a strong stomach for market volatility. However, dollar-cost averaging can work well for those who set aside a portion of their paycheck to invest as it allows them to stay on track with their financial goals.
Rebalancing Your Portfolio
Rebalancing aims to sell the winners (stocks with high valuation) to buy the losers (stocks with low valuation) to keep the portfolio balanced. However, studies suggest that doing so might reduce the returns because stocks tend to outperform bonds over the long run. Instead of stock-to-bond rebalancing, strategies that involve regular rebalancing among stock sectors often enhance returns. It’s best to rebalance when your portfolio is so lopsided that it causes concern. Rebalancing, in the long run, reduces returns, but it reduces the risk to a comfortable level.
Harvesting Tax Losses
Selling losing investments in the taxable account during a bear market to offset capital gains on other investments is a tax-efficient strategy. This strategy allows you to offset up to $3,000 in ordinary income, and any remaining losses can be carried over to offset future taxes. However, investors should beware of the wash-sale rule, which says that if you or your spouse buys a substantially similar investment within 30 days before or after the sale, your losses will be disallowed. It’s essential to consider the market conditions to determine whether it’s beneficial to sell losing investments.
Related Facts:
1. Stay invested, focus on your long-term goals, and do not let market volatility derail you.
2. Diversification is key when investing: spread your investment across various assets.
3. High fees can diminish returns, so opt for low-cost funds and investment products that align with your investing goals.
Key Takeaway:
Investing cliches can be helpful in giving us a starting point in investing, but it’s vital to consider market conditions and personal circumstances before engaging in any investment strategy blindly. No investing strategy is best for everyone, and it’s essential to personalize your approach to maximize your returns.
Conclusion:
Investing cliches are useful, but they don’t always hold strong in the real world. Investors should choose their strategies based on facts, market conditions and personal situations. With the right mindset and approach, investing can bring financial security and success.
