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04.07.19 14 INVESTMENT IF you are wary of the myths below, carry out careful re- search and use your common sense; investing can open up a world of financial opportuni- ties. 1. Diversification is key to investment success e dangers of being insuffi- ciently diversified when invest- ing has been written about at great length. Put simply, have all your eggs in one basket and you stand a greater chance of seeing big losses if something goes wrong. But is this belief watertight? While spreading your risk generally makes a lot of sense, there are caveats. Firstly, by buying too many different things, you risk hav- ing no oversight to ensure that your portfolio does actually have a good balance. Secondly, by holding too much, you are likely to do in- sufficient research and could fail to keep abreast of devel- opments in the businesses or funds you have bought. Back in 1958, legendary US investor Philip Fisher wrote in his book, Common Stocks and Uncommon Profits: "Investors have been so oversold on di- versification that fear of having too many eggs in one basket has caused them to put far too little into companies they thor- oughly know and far too much in others about which they know nothing at all." ere is so much received wisdom around investing, but do we need to take it with a pinch of salt? We look at some commonly held investment ideas and ask whether they stand up to scrutiny 2. No one ever went broke taking a profit ere is a patent logic to this statement. Selling investments when they are up guarantees that you make a profit – using this strategy can't leave you with nothing or worse. But following this logic too far could lead to bad investment decisions where you sell your best-performing stocks and keep your losers, hoping they will eventually come back up. Max Ward, manager of the Independent Investment Trust, explains: "As an investor, the hardest lesson to learn is that you will be wrong an awful lot of the time (I reckon the best investors are wrong 40% of the time), so you need to get good at recognising more quick- ly than others when you are wrong and act accordingly." 3. The market knows best When judging the value of a company, many people simply look at the market consensus, as if it is a wise entity whose view should be respected. But what if other investors are wrong ? Perhaps they are more optimistic or pessimistic than they need to be or their view is affected by other things that are going on. Legendary investor Warren Buffett questioned this view in his annual letter to Berkshire Hathaway's shareholders in 1987: "Mr Market is there to serve you, not to guide you. It is his pocketbook, not his wis- dom, that you will find useful. "If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall un- der his influence. Indeed, if you aren't certain that you under- stand and can value your busi- ness far better than Mr Market, you don't belong in the game." 4. You can anticipate short- term market movements Many investors have tried to make 'buy' and 'sell' decisions on financial assets, usually stocks, by attempting to pre- dict future price movements. is is something many peo- ple do almost instinctively when their view of economic matters determines where and how they invest. For example, they might sell their stocks in a house builder, based on the view that there is a housing bubble and it is about to burst, instead of looking at the spe- cific company fundamentals – whether it is well run, gener- ates cash and has a strong bal- ance sheet. Alternatively, they might move out of stocks into cash in the belief a stock mar- ket crash is coming. John Bogle, founder of e Vanguard Group, says: "Timing the market is impossible. Even if you sold stocks just before a decline (a rare occurrence!), where on earth would you ever get the insight that tells you the right time to get back in? One correct decision is tough enough. Two correct decisions are nigh on impossible." What has proved a more prac- ticable and very much more successful strategy than market timing is buying good shares or funds cheaply and then holding them for the long term. As Philip Fisher notes: "Short- term price movements are so inherently tricky to predict that I do not believe it is possible to play the in-and-out game and still make the enormous prof- its that have accrued again and again to the long-term holder of the right stocks." 5. For higher returns, you need to take on more risk Is it always true that taking on more risk leads to higher returns? Over the long term, buying 'boring' quality shares or funds can sometimes prove more lucrative. Terry Smith, fund manager of the top-performing Fundsmith fund, says: "Rather than seeking superior portfolio performance by buying high-risk stocks, in- vestors should seek out 'boring' quality companies that have predictable returns and supe- rior fundamental financial per- formance, and take advantage of their persistent under-valua- tion relative to those returns to buy and hold them." 6. Brokers and their price targets must be taken seriously Investment notes written by analysts can be useful. eir ar- Investment myths W hether you are a novice or seasoned investor, you will come across many clichés about how to succeed. From diversification to taking on more risk for higher returns, there is a whole host of investment beliefs that it's good to question