Tax Planning Strategies for High-Income Earners
» by Chad Warrick and Jason Print, CFP®, Co-Presidents and CEOs
Far too many investors fall for false strategies that prevent sound decisions and limit long-term gains. Read more about common money myths and how Summit helps their clients invest smartly.
Investing Myth 1: Investment Is a Do-it-Yourself Project
Most investors lack the knowledge and experience to manage their portfolios properly, which leads to illogical and poor decisions based on emotion. A 2019 study by the DALBAR organization showed that investors underperformed the market by 3-7% annually over any recorded 20-year period.
Investing Myth 2: You Can Get Rich Through Investing
Another money myth is that investing in the market leads to significant wealth. For people with limited capital, the stock market is a good strategy for protecting assets and creating a fund for your goals. Market gains serve as a function of how much you have to invest, and achieving a rate of return that turns modest means into wealth is unusual.
Investing Myth 3: Stock Picking Beats the Market
Feeling you need to beat the stock market by strategically picking hot stocks is a poor investment strategy, and there’s always hot new stock on the market. Hendrik Bessembinger from Arizona State University published a study that analyzed stock market returns since 1926 that discovered the following:
Investing Myth 4: Market Timing Strategies Beat the Market
Believing you need to perfectly time the market is one of the most common money myths. Market timing strategies are a matter of luck, and trying to trade in and out of the market consistently forces you to take on significantly higher risk. Long-term investors are better off investing smartly and not waiting for a major market correction. Waiting for the next downturn means you’ll likely miss out on profitable market gains. Furthermore, there is little evidence to show that active funds navigate market downturns better than passive funds. An October study by Morningstar analyzed nearly 3,000 active funds and found that only 47% outperformed their passive counterparts between June 2020 and June 2021. Active funds that use market timing strategies struggle to meet their benchmarks and have lower long-term success rates.
Investing Myth 5: Fees Don’t Matter
Trading, custodian, and research costs aren’t always readily known, and it’s easy for these unnecessary fees to add up. Having a sound investment strategy that manages activities helps limit these expenses.
Investing Myth 6: Insiders Know Everything
The concept that someone is manipulating the market or that insiders consistently take advantage of arbitrage or mispricing leads to wild goose chases and poor decisions. It’s important to remember that no one knows what the market will do and that chasing bad advice causes unrealistic pessimism.
Investing Myth 7: Oversimplify the Math
Investment math is more complex than a simple average, and it’s possible that an average return may look like a positive return but is actually a loss. For example, a $100 investment that has a 100% gain in the first year and a 60% loss in the second year appears to be a long-term gain, but it isn’t. That $100 investment became $200 at the end of the first year, and that 60% loss of value in the second year represents $120. This leaves you with $80, a net investment loss of $20.
Investing Myth 8: There’s a Wizard of Odds
There is no special formula for consistent, low-risk investment, and retaining the services of someone who promises major returns is a fool’s errand. Expertise and knowledge vary depending on who you ask, but no magic formula exists that consistently beats the market.
Investing Myth 9: Investing in Stocks Is Similar To Gambling
This investing myth causes many people to shy away from the stock market. Let’s go over why investing is inherently different from gambling. A stock represents ownership and entitles the holder to a fraction of the profits generated by the company. The stock market is constantly trying to assess the value of a company and the profit that’ll be distributed among shareholders. Stock prices fluctuate because business conditions and future earnings projects are always changing. Gambling, however, is a zero-sum game. It simply takes money from a loser and gives it to a winner. It doesn’t create value, and it never increases the overall health of an economy.
Investing Myth 10: Your Behavior Doesn’t Matter
Peter Lynch, the famous investment fund manager, said it best when he said: “Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in the corrections themselves.” Investment value is created or destroyed by investor behavior and not by anything inherent in the stock itself. Risk tolerance changes from year to year and investor panic has ruined multiple sound portfolios. Wise investors see the market as a way to achieve return on investment because returns outweigh risk.
Investors should treat their investments rationally as a scientific enterprise that’s statistically predictable even though performance is unpredictable. This rule won’t allow you to become wealthy, but it will help you gain a steady and reliable return, safeguard your assets from inflation, and provide additional income when your investments mature.
How Summit Helps Clients Invest Smartly
The wealth management strategies offered by Summit Wealth Partners help bring clarity to your finances by guiding you through the market clutter. We have the depth of experience, comprehensive services, and innovative approach that deliver a personalized experience so you can reach your long-term financial goals. We strive to keep things simple, efficient, and effective. We carefully monitor progress to make sure your financial plan stays on track. Contact Summit Wealth Partners to learn more about how our safely managed strategies help protect and preserve your wealth.