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Debunking 8 common investing myths

By WTOP Staff

Convenient truths vs. evidence-based investing

It’s easy for investors to absorb myths on best investing practices from the media and financial pundits. That’s why it’s important to know the difference between well-researched advice and entertainment masquerading as financial news. Be mindful of these eight common investing myths:

Past performance will show you what to expect from future returns.

In a recent research note, “Quantifying the Impact of Chasing Fund Performance,” Vanguard compared the returns of a buy-and-hold strategy with a performance-chasing strategy from 2004 to 2013. Across the board, the buy-and-hold strategy yielded significantly higher returns. Unfortunately, investors who relied on past performance ended up chasing returns that the funds did not repeat.

Investment pros are skilled in beating the market.

One peer-reviewed study, “False Discoveries in Mutual Fund Performance: Measuring Luck in Estimated Alphas,” published in the Journal of Finance in 2009, looked at the 32-year record of 2,076 stock mutual funds. The number of fund managers who beat their benchmarks over time was “statistically indistinguishable from zero,” according to the study. The few that beat their benchmarks were simply lucky. Wall Street is extremely proficient in one area: confusing luck with skill.

Investment clubs are a source of sound investment advice.

Investment clubs provide a place for networking and socializing. However, the very nature of the group’s activities (stock picking, market timing, trying to select the next “hot” fund manager) will likely result in lower returns. A study, “Too Many Cooks Spoil The Profits: Investment Club Performance,” by Brad Barber and Terrance Odean, showed that 60 percent of investment clubs underperform the market.

Alternative investments are good choices.

The hype surrounding these investments is not supported by the data. For the past decade, the index used to measure the performance of the hedge fund industry underperformed indexes in each major stock category and even three Treasury bond indexes. It accomplished this remarkable feat by charging obscene fees, typically 2 percent of assets under management plus 20 percent of profits.

An all-cash strategy is a financially prudent and conservative choice.

An all-cash strategy seems conservative, but it is actually both risky and foolish. It’s risky because inflation significantly erodes purchasing power over time. An all-cash portfolio will not keep pace with inflation and practically ensures a loss of purchasing power. This strategy is foolish because the expected return from even a conservative allocation of stocks in a portfolio is likely to at least keep pace with inflation.

All risk is bad.

“Risk” has become a pejorative term. But investors are rewarded for taking risk. Without risk, it would be impossible to achieve inflation-beating returns. There is a reason Treasury bills and certificates of deposit, backed by the full faith and credit of the U.S. government, are referred to as having a risk-free rate of return. Those investments currently pay less than 1 percent.

Warren Buffett can pick stocks. So can I.

Instead of concentrating on Buffett’s stock-picking ability, investors would be wise to heed this advice in his recent letter to shareholders: “Forming macro opinions or listening to the macro or market predictions of others is a waste of time.” He counsels against listening to “pundits” or — worse still — acting on their comments.

If I listen to the best financial pundits, I’ll always make the right investment decisions.

Here’s an easy-to- implement resolution: Ignore the financial news and the musings of pundits. Their predictions about the future of the market are no more reliable than yours. The best indication of the status of the market is the price set by millions of traders every day. If it became “obvious” to them that the market was about to crash, stock prices would decline.

More from U.S. News

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The Powerful Psychology Undermining Your Returns

Debunking 8 Common Investing Myths originally appeared on usnews.com

Don’t Settle for Student Loans to Pay for Online Education

By WTOP Staff
Online college programs are becoming a more popular choice for prospective students, with one study finding that more than 6 million students enrolled in at least one online course in fall 2015. The popularity of these courses can be attributed in part to their flexibility with working adults' schedules, students' ability to progress more quickly through online programs and, oftentimes, cheaper tuition. [See 10 low-cost online bachelor's programs for out-of-state students.]Online degrees can be beneficial to many college students, but some studies have shown online learners complete their programs at lower rates than students at traditional brick-and-mortar campuses. Individuals with student loans but no degree comprise two-thirds of defaulted borrowers. Though these numbers are not encouraging, just like for traditional programs, there are ways to reduce how much you'll need to borrow for an online program to ensure you won't become one of these statistics. Don't just settle on borrowing student loans to cover the whole cost of your program and living expenses. Instead, start thinking about how to cut costs and cover your balance in different ways, such as the following. -- Grants and scholarships: Even though you are taking an online course, you can still apply and receive grants and scholarships. But your first step should be to complete the Free Application for Federal Student Aid, commonly referred to as the FAFSA, which will allow you to receive a Pell Grant if your expected family contribution is low enough. The EFC criteria and award amounts are adjusted annually, but the 2017-2018 academic year awards range from $606 to $5,920, which could significantly lower the amount you borrow annually. Your next step is to apply for scholarships. You can start by checking online scholarship search engines, such as the Salt Scholarship Search, College Board's BigFuture and Peterson's. But don't forget to take advantage of local organizations and your school's financial aid office. Both may offer scholarships that you can't find with a national scholarship search. [Review these 10 sites to kick off your scholarship search.]For instance, organizations like the Elks Club, Knights of Columbus or the Rotary Club typically offer scholarships annually to local students. Just because you're going to school online doesn't mean you're ineligible. Visit your local library for scholarship listings, and ask around town. You might be surprised how many local organizations offer scholarships. While these scholarships typically aren't large, every little bit counts. Each dollar you receive in a scholarship is a dollar you don't have to borrow and pay interest on. -- Work-study: Another option for online students may be work-study awards. Not all students enrolled in online programs are eligible, but students at some schools -- including, for example, SUNY Empire State College and Liberty University -- are. Work-study awards are not given upfront like scholarships and grants. In most cases, they are an offer to earn up to the awarded amount if you secure an eligible work-study job. While there is a misconception that all work-study jobs must be on campus, students can work for off-campus, nonprofit or public employers as long as the work is in the public's interest. You may be able to work for a for-profit employer if the job is relevant to your course of study. No matter who the outside employer is, it will need to have an established agreement with your college for you to receive work-study funds. Remember, to be eligible for federal financial aid, you must be enrolled and pursuing a degree or certificate. If you're not working toward a credential, Pell Grants and work-study won't be option, but you may still be able to take advantage of private scholarships -- just be sure to read the eligibility criteria carefully. [Explore what to know about financial aid in online programs.]-- Pay as you go: One of the great benefits to enrolling online is the flexible schedule, which can allow you to complete your college coursework around your responsibilities. But prospective students often overlook using their part- or full-time job earnings as an option for paying for college. Almost 80 percent of college students in 2015 worked at least part time while attending classes, according to the National Center for Education Statistics. By budgeting and thinking strategically about your college costs, you can likely reduce your dependence on student loans by paying a portion out of pocket. Many -- but not all -- online programs are less expensive than traditional programs and often have shorter payment periods. Six, eight or 10 weeks are common course durations. Because of the frequency of payments in an online setting, you may be well-placed to pay as you go and possibly avoid borrowing altogether. Attending college online and avoiding student loans may be challenging, but if you are willing to put in the effort, you can limit the amount you need to borrow. More from U.S. News Q&A: Understanding Student Loan Discharge Eligibility Student Loan Refinancing Isn't Right for All Borrowers
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