There are a lot of misguided investment beliefs out there. On the other hand, here are some that have proven helpful to conservative investors seeking long-term, lower-risk gains.

Economists and the media around the world spend an awful lot of time trying to predict economic growth rates. Virtually all of these forecasts will prove inaccurate. Few if any will provide meaningful help to investors, at least directly.

However, our view is that many economic and financial uncertainties have a beneficial side effect: they tone down investor expectations and investment beliefs.

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Why toning down investment beliefs is good for investors

This is a good thing for stock buyers, because low investor expectations tend to cut risk. Think about it: when investor expectations are low, investors tend to devote less money than usual to the stock market. They are braced for bad news. So, neutral news sounds favourable to them. Out-and-out good news seems like cause to rejoice. This can spur them to buy and drive prices up.

The opposite happens when investor expectations are high. When it seems everything is going smoothly in the economy, investors lower their guard. They accept more risk in the types of securities they buy, and they devote a larger portion of their total assets to the stock market. Any surprises tend to seem negative to them, since they were only expecting more good news. This can spur them to sell and drive prices down.

Of course, investor expectations are relative—they never go so low that they can’t get worse, or so high that they can’t get better. But the best investment opportunities for Successful Investors that we’ve seen occur at times when investor expectations were about as low as they can be.

The limelight rarely focuses on investment beliefs worth following

As you may know, one of the three key points to our Successful Investor philosophy is that you need to downplay or avoid stocks in the broker/media limelight. A similar warning applies to investment beliefs.

If you’re looking for investment beliefs that will keep your portfolio secure, start by excluding investments in popular stocks that have gained ground in the broker/media limelight. It’s not a spotlight that most good stocks are in. That’s because those stocks have been high-quality investments for longer than the limelight alone could have maintained.

When investment-related ideas find their way into the broker/media limelight, something similar, but upside-down can happen. With ideas, the limelight tends to shift focus. Rather than promote seemingly good reasons to buy a particular stock, brokers and the media instead tend to popularize seemingly good reasons not to buy any stocks.

Here’s a short random sample of “seemingly-good-reasons-not-to-buy-stocks” that have made their way into the limelight over the years:

• The stock market is headed for the proverbial “seven bad years”;
• The economy has entered a long period of “secular stagnation,” which will hold the stock market back for years to come;
• The sudden expansion of deficits following the recession was sure to spark a huge revival of inflation;
• The social security system is running out of money and will require huge tax increases to stay afloat;
• The stock market is much more expensive than it looks, judging by the Shiller P/E ratio (this ratio uses an average of earnings for the past 10 years, rather than the customary P/E based on the latest year’s earnings, or estimates of earnings for the coming year);
• The market has been going up for so long that it “has to” come down soon…

One of our favourite investment beliefs: Keep long-term conservative investing goals in view

The goal of an investor, particularly if you follow the Successful Investor approach, is to make an attractive return on your investments over a period of years or decades. Failure means making bad investments that leave you with meagre profits or losses.

Unsuccessful investors can still make some profits. They just don’t make enough to offset the inevitable losses and leave themselves with an attractive return. If you focus on the idea that you never go broke taking a profit, you may be tempted to sell your best investments whenever it seems the investment outlook is clouding over.

On occasion, you may succeed in selling just prior to a major downturn, and buying back at much lower prices. More often, prices will soon hit bottom and move up to new highs. If you buy back, you’ll pay higher prices. If you had followed this investment belief with Canadian bank stocks, for example, you could have missed out on some big gains over the years.

In hindsight, market downturns are easy to spot. Spotting them ahead of time is much harder, and impossible to do consistently. After all, if you could consistently spot market downturns ahead of time, you could acquire a large proportion of all the money in the world, and nobody ever does that.

The problem is that you’ll foresee a lot of market downturns that never occur. All too often, the market-downturn clouds disperse soon after skittish investors have sold. Good reasons to sell do crop up from time to time, of course, even if you follow a long-term conservative investing approach. But “You’ll never go broke taking a profit” is not one of them.

What are some investment beliefs you held when starting out but have let go of as your investing career has progressed?

What investment beliefs would you share with a young investor trying to make smart choices?