There are many investment myths that can lead you to make costly mistakes if you believe in them. Here we outline ten of the most dangerous.
Diversify as much as you can
Diversification is claimed to be a crucial means of reducing portfolio risk, as we are constantly told not to “put all our eggs in one basket.” However, little is generally said about the dangers of over-diversification. If you diversify too much you risk having a portfolio comprising of too many securities (say, much more than 20). The risk here is that with so many securities to keep track of, you’re unlikely to know them all thoroughly. Investing in something you don’t fully understand can be even more dangerous than holding an inadequately diversified portfolio.
You can’t beat the market
By definition, a majority of investors can’t beat the market. However, a select group of value investors have consistently beaten the market by buying cheap and safe stocks. These include Warren Buffett and Walter Schloss.
This time it’s different
Asset bubbles have reoccurred continually throughout history yet while they are taking place you’ll often hear how the fundamental rules and principles of investing have somehow changed this time round. It isn’t so. Had investors ignored arguments to justify stretched valuations for companies that weren’t even profitable during the dotcom boom (1995-2000), much money would have been saved.
Higher returns necessarily entail greater risk
Reducing your risk means limiting the downside of an investment. By so doing you can avoid loss of capital, which is what really reduces portfolio returns. Value investors such as Warren Buffett minimise their risks to achieve greater returns.
Markets are efficient
Some markets may be but the stock market isn’t. Information isn’t always disseminated equally to all market players and there is continual mis-pricing of equities from which savvy investors can profit. It is this inefficiency that enables some investors to buy undervalued stocks.
You need a complex strategy to beat the market
The most simple strategy of buy cheap and sell dear, building in a margin of safety by so doing, has been shown to outperform any other strategy. If a strategy is over-complicated it is best to avoid it.
Hot growth stocks outperform boring ones
It isn’t necessarily so. Just witness the outperformance of FTSE stalwarts 
GlaxoSmithKline (GSK) and Diageo (DGE) over the past few years, while some go-go growth stocks went bust. Moreover, beaten down boring stocks can often shoot up on any good news, while glamorous growth stocks on high price-to-earnings ratios (P/E) may need only disappoint slightly to see their price plummet.
Bonds offer risk-free return
In the past they may have done but as the return you are now getting is below inflation, and there is also the risk of default given the sovereign debt crisis, this is no longer so. Warren Buffett put it perfectly when he quoted Shelby Cullom Davis: “Bonds promoted as offering risk-free returns are now priced to deliver return-free risk.”
The key to value investing is getting stocks at low prices
In the short term, price has no direct relation to value in investing. What you need to work out is the value of a stock, from which you can then decide if the price is cheap or not. For example, when Warren Buffett first bought Coca-Cola stock many thought it was expensive, yet the price he paid turned out to be cheap.
Earnings are more important than the strength of a balance sheet
It is a mistake not to adequately analyse a balance sheet, as earnings are easily manipulated and can be volatile. The balance sheet provides the foundation upon which any company must build. If it is weak even a profitable company can quickly go bust if earnings drop. Whereas, a financially strong company can obtain access to finance more easily and often makes an attractive takeover candidate if its earnings fall.
