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10 Wall Street Lies that Lose Investors’ Money

How to Avoid the Hype in Wall Street Lies and Make Money Your Way

I started doing investment analysis for advisors nearly a decade ago and really got into the industry after earning the Chartered Financial Analyst (CFA) designation in 2011. I’ve worked with everyone from small advisors at community banks to large venture capital firms and can tell you one thing is common across all of them –

That Wall Street lies to its investors!

I’m not talking about the direct and illegal stuff like guaranteeing returns or fudging the numbers on an earnings report. The lies I’m talking about are much worse because they’re told under the disguise of trying to help you.

Why would Wall Street lie? Working as an advisor or broker used to be about collecting fees off your client’s accounts or commissions on trading. That was bad enough but now we have a whole new perversion of investing on TV and the internet.

Making investing entertaining means you’ll come back for more. That’s worth billions in advertising dollars…on top of the billions the industry still collects on fees and commissions.

Investing advice isn’t made to make you money anymore, it’s made to keep you coming back for more and the result is horrible investor returns that will never meet your financial goals. The average investor earned just 2.6% a year over the decade to 2013, just over a third the return on the stock market and even less than a 100% bond portfolio.

wall street lies investor return

Knowing the biggest lies Wall Street dishes out is just half the solution. Learn the basics of investing and how to play the game your way to take control of your own financial future.

Wall Street Lies #1 – Investing is about Picking Stocks

Turn on CNBC or any other investing resource and you’ll get ten stock picks an hour…or more. Analysts are always talking about their favorite stock, so much that you get the impression all you have to do is pick a few winners and wait for the good times.

Why this fixation with picking stocks? First because it helps perpetuate another lie that Wall Street analysts know something you don’t and that you should pay them for their advice. Worse than this overconfidence on the part of analysts is the fact that many just want you to buy the stock so they can sell their shares at a profit. This is especially notorious with activist investors. They can’t wait to go on TV to pitch their ‘favorite’ investment and convince you to drive up the price for them.

Investing isn’t about picking stocks. In fact, you might not even need stocks. Investing is about meeting your financial goals by taking an appropriate level of risk for some return in the future.

You’ll never hear about creating your personal investment plan or deciding how much risk is appropriate from the pundits on TV…because it’s not entertaining and they can’t sell it to millions all at once.

  • Put together your own personal investment plan including the annual return you need to meet your goals and what assets you need in your portfolio
  • Find out your own investing risk tolerance with these ten questions and understand how it affects your annual return

Wall Street Lies #2 – You Should Listen to Stock Market Analysts

Don’t get me wrong, stock market analysts do serve a useful purpose in the markets. They put together the information and analysis that just wouldn’t be possible for someone with another full-time job. Analysts also play the role of market makers, supplying the buying and selling needed so that you don’t have to take a huge cut in price when you want to get out of an investment.

While the value of the information is positive, it’s way over-stated on TV and on the internet.

To hear some analysts talk, you’d think they have a Magic 8-ball back in the office that tells them the future. They predict a company’s earnings down to the penny and make bold calls to get your attention. Of course, they’re counting on the fact that you’ll hear so many opinions over the next month that you won’t even remember to check whether their recommendation was right or wrong.

investing lies stock market myths

It’s fine to get investing ideas from an analyst but you always need to be skeptical and do a little of your own research. This doesn’t mean you have to sit down and read through 100+ pages of a company’s annual report but understand the key metrics and themes in investing. It’s actually not as difficult as it may seem and you don’t need years of education or classes. Check out a few of the investing books and courses on the blog or available on Amazon.

Wall Street Lies #3 – You Can’t Beat the Market so Don’t Try

One of the biggest lies over the last few years has been that you can’t beat the market so you should just put all your money in market funds. This one was made famous by John Bogle. It shouldn’t surprise you then that he’s the founder of one of the largest fund companies and makes billions when you just stick your money in funds?

It may be true that you’re not going to beat the return on the stock market by a wide margin, especially if you try trading in and out of stocks on analysts’ recommendations, but the market is made up of people and that means its flawed. Investors are incredibly short-sighted, believing that one group of stocks can do no wrong while another group will never make money.  Taking the long view around themes that play out over decades will help you earn a return that would make any hedge fund manager jealous.

I talked about three long-term themes in a recent post on the best investments for the next 30 years. These themes will be supported by the force of billions of people and trillions of dollars in spending over the next several decades. These generational shifts will propel entire sectors of the economy, meaning you don’t have to pick individual stocks to make money.

I do agree that it’s impossible to beat the market if you focus on individual stock picking. Trying to buy and sell stocks to beat the market will always lose because of the fees and commissions in stock trading. Even on the most inexpensive stock trading website, buying shares of 30 stocks for a diversified portfolio will cost you over $200 each time you go to invest.

Wall Street Lies #4 – You Need to Play the Stock Market Game

This is actually the idea behind one of my favorite articles comparing investing with the game of tennis. Professional tennis players know they must try for the risky shots, hoping to win the most points against their opponent. Try playing this game with just an amateur’s skill level and you’re more likely to whack the ball over the bleachers. The way an amateur tennis match is won is by making the fewest mistakes, letting your opponent try for the risky shots and just focusing on getting the ball over the net.

It’s the same way with investing. Professional money managers have to beat the returns earned by other managers or they’ll lose clients. They trade in and out of investments and put money in risky bets for the ace. Turns out even professional investors aren’t that good at the game and only about half beat the stock market’s return in any given year.

Telling investors they need to play the professional’s game in stocks does one of two things. You either rack up thousands in fees which go to line the pocket of your advisor…or you give up and just pay your advisor to make all the decisions which also helps to line their pockets.

Instead, learn to play the investing game by the amateur rules. Don’t borrow money to invest on margin. Keep your investing fees low and get the free money by investing through tax-advantaged retirement accounts.

Wall Street Lies #5 – Investing is about Huge Returns

I get it. I understand that people like to fantasize about finding that next hot stock and instantly having more money than they dreamed possible. The investing media regularly covers the top gainers of the day and the stocks that have exploded higher.

What the media doesn’t talk as much about is that investing is about the risk-return trade-off. For every level of return, there’s a level of risk. You could invest in ultra-safe U.S. Treasuries but you’ll only make about 1.9% a year. By comparison, you could invest in penny stocks with the potential to triple your money or more but you could just as easily lose everything.

Investors see risk in every investment and think investing is gambling. Investing involves risk but it’s a risk you control. I haven’t met an investor yet that needed those huge returns to meet their financial goals. In fact, after actually creating a personal investment plan, most investors are surprised at the return they need to meet their goals.

Find the return you need to meet your goals and then take an appropriate level of risk to earn that return. Stop chasing the fantasies and hot stocks that will only run up your investing fees and leave you broke.

Wall Street Lies #6 – Investing is about the Investment

You should start seeing a theme to most of the Wall Street lies. Most revolve around getting you to buy and sell stocks and rack up those investing fees or pay for the stock market ‘wisdom’ of the pros.

The truth is that investing is just as much about HOW you invest as it is in the actual investments you buy.

You get an instant deduction on your income taxes when you put money in your retirement account. If your income is below a certain amount, you might even get an additional tax credit for the amount you invest for retirement. Just the income tax deduction alone on your free tax filing for 2017 can be worth an instant 15% to 40% return on your investment, depending on your tax bracket. Combine that return with just a buy-and-hold investment in the whole market and you’ll beat every money manager out there.

stock market lies

Wall Street Lies #7 – You Need to Worry about a Stock Crash

Wall Street wants you to worry about the next stock market crash because it means you’ll follow its trading advice and will keep glued to the television and boosting ratings.

As an investment analyst for advisors and private clients, I watch the market daily and hear every fearful quip about a new correction or full-on stock market crash.

But none of it bothers me.

Have I achieved some inner peace, a level of Zen that has helped me transcend earthly worries?

Nope…but I do follow two simple investing rules. Two rules that every investor should follow to make investing nearly stress-free.

The first rule of investing, one that gets very little attention from pundits and analysts on TV, is the need to know your own risk tolerance. This is how much of those stock market ups and downs you are able and willing to take. It’s your money at risk so why do people spend so much time listening to some TV ‘entertainer’ scream out what stocks they should be buying?

Understanding your risk tolerance will help you make a decision on another rule of investing, diversification. To understand diversification, understand that there are different types of investments called asset classes. These asset classes; think big categories like stocks, bonds and real estate, pay out differently and react differently to the economy and other factors.

The idea of diversification is that, since these different asset classes react to different factors, then buying investments in all of them means your overall wealth is not dependent on one group. Stocks may tumble in the next stock market crash but your bond and real estate investments will continue to provide stable returns. While the return on your bond and real estate investments might be limited, your stock investments offer the potential for growth when the markets are booming.

Wall Street Lies #8 – You Can’t Manage Your Own Investments

The community of advisors and analysts love using jargon and complicated strategies to confuse investors. If you can’t understand what they’re saying, you’re more likely to throw your hands up and pay them to manage your money.

As I write this, there is a lot of talk in the investing community about new rules for financial advisors. Rules that make it a requirement that your advisor has your best interest in mind when making recommendations.

What? You thought your advisor was already thinking about your welfare when he told you to buy that expensive mutual fund.

In fact, a study by the University of Chicago found that 7% of financial advisors have been disciplined by regulators for misconduct with investor money and nearly one-in-five of the advisors at one firm have been disciplined.

stock market wall street lies

One of the biggest themes in uncovering these Wall Street lies is that investing is much less complicated than you’re made to believe and that you can manage your own investments. You don’t have to be a math graduate from MIT to understand how to invest in long-term themes and save on costs. Find the right sources of information and investing can actually be pretty easy.

Wall Street Lies #9 – This Time is Different

This one is so ridiculous that even analysts and advisors laugh when they hear it…but then turn around and tell the lie to their clients.

There are some measures that have always led to disappointment in stocks. Rising interest rates, an overheating job market, stock valuations well over their long-run average and an aging business cycle have never been good for stocks. Every market analyst knows this but they get caught up in the euphoria of rising stock prices and conjure up excuses for why stocks will continue higher.

Of course, nobody comes right out and says the exact words, “This time is different.” The lie is always told by rationalizing how things are different. Analysts argue that companies are now able to boost weak sales with cheap borrowing so will be able to make money even in a recession or that some hot industry is revolutionizing how things are done so you can’t use the old way of valuing their stock shares.

It’s never different and stocks always fall back to the old measures and long-term averages. Understand how these long-term indicators affect the economy and the stock market and be wary when Wall Street tries to justify something out of the ordinary.

Wall Street Lies #10 – Buy and Hold is Dead

Buy-and-hold investing is simply the process of buying a stock and holding it for ten years or more to your financial goals. It’s the ultimate strategy in reducing investing costs and keeping from the bad investing decisions that lose money.

Is it any surprise that you hear stock-pickers and commission-based brokers exclaim that buy-and-hold is dead as an investment strategy? These are the same experts that say you must ‘beat’ the market and always seem to have a stock recommendation ready to pitch.

The fact is that while investing can be easy, it can also be a little boring if done correctly. If you are investing in the long-term generational themes that will outperform the market then you are going to be holding a stock for decades. It may not make your advisor rich but you’ll get the best return on your investment and won’t have to trade in and out of stocks.

These top ten Wall Street lies aren’t the only ones but are the ones that seem to lose investors’ money the fastest. Learn how to spot the investing myths and mistakes that most investors make and how to take control of your own financial future.

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