Financial literacy is vital in today’s economy, and one aspect of that is investing. Unfortunately, the only thing worse than not knowing anything about investing is believing myths that some people think are facts. Today we will review 31 common investing myths and expose the actual truth.
1. Investing in stocks equates to gambling
Gambling typically involves risks in which the odds are not in your favour, and you do not have all of the pertinent information necessary to win consistently. While investing does have many unknowns, the difference is that you’re making a calculated decision influenced by your understanding of many of the factors involved.
2. The stock market is exclusive to rich people and brokers
Claims that market advisors can call the market’s every turn are false. Thanks to the internet, the market is more accessible to the public than ever before. Individuals can access research tools that were previously only available to brokerages. Fractional shares and Robo-advisors allow potential investors to access the market even with minimal investments.
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3. Investing is a way to get rich quick
You won’t get rich overnight. Investing pays off in the long term. It’s best to have the discipline to stick to a long-term plan. Wealth creation happens with years of contributing and market compound growth.
4. You must pay off all your debt before investing
Before investing, having a solid financial foundation is essential, but that doesn’t mean you have to pay off all your debt before investing. It is best to pay off high-interest debt such as credit cards before investing. However, if you wait too long, you will miss out on years of compounding growth, which can be hard to catch up on. Allocate funds for both financial goals after understanding your budget.
5. Now is not the right time to start investing
The tone of media coverage on markets can be scary, but the best time to invest is whenever you’re ready. Once you invest, you benefit from the power of compounding returns.
6. You should hire someone to manage your money
One of the more common investing myths is that you have to hire someone to invest in the stock market. You should take an active role in enhancing your understanding of your finances. Start by boosting your financial literacy. Don’t trust someone else with all your financial planning. Remember that most financial services come with expensive fees.
7. Investing is complicated
Investing can be complicated if you choose to make it so. There is no shortage of complex (and costly!) financial instruments and alternative investments. But it doesn’t have to be complicated. The simple truth is that you can match and even outperform the market through passive, low-cost index fund investing. You only need to check that your asset allocation is still appropriate and working for you now and then.
8. The professionals always beat the market
Anyone can beat the market, not just professionals. You’ll be doing better than most investors if you can simply match the returns of the S&P 500. One great way to achieve that is by holding passive, low-cost index fund
9. It is impossible to beat the market
It’s not impossible to beat the market, but the skewed market returns increase the odds against investors. The majority of stocks underperform, but a few high-performing stocks usually pull up the average.
10. The higher the risk, the greater the reward
There’s always a risk when you invest money, whether it’s a lot or less. In theory, higher risks do often yield better results when investing. However, there are investments with lower risks that still have the potential to provide high rewards.
11. Holding cash is safer than investing in the stock market
There are a few benefits to holding cash, such as taking care of emergencies. However, while it might feel good when the stock market is in free fall and also help you avoid market volatility, it’s not a wise move over the long term. Cash loses its value over time due to inflation.
12. Investing involves locking away your money for years
Being invested in the stock market over the long term reaps the most rewards and thus is highly recommended. Early withdrawal can negatively impact your returns. However, this doesn’t mean you cannot access your money. Various investing accounts and instruments give you the ability to withdraw your funds at short notice..
13. You are automatically invested when you open and fund an account
Investing does not automatically start after opening and funding an account. You have to start buying investments. If you aren’t ready to put your money into investments yet, then you can open an account for free. Use stock market simulators to practice investing.
14. Investment fees are small and insignificant
Small and seemingly insignificant investment fees can have a high cost in the long term. For example, a $60,000 investment earning a return of 10% per year will grow to $1,046,965 over 30 years. Let’s assume we pay a 1% investment fee and thus reducing the return to 9% per year. The investment now grows to $796,061. The 1% fee costs $250,904 – almost 25% of the portfolio’s value! Fees matter.
15. Stocks are the only option for investing
Investing in stocks isn’t the only way to build wealth. Several other options include investing in precious metals, acquiring real estate, and building a business, among others.
16. You need to have lots of money to have a diversified portfolio
You can still diversify your portfolio with minimal funds. A simple method to accomplish this is by purchasing ETFs and index funds. They give you instant diversification by acting as a basket for different stocks. Read about both in detail before buying them because they trade differently.
17. All investment advisors are the same
There are different types of investment advisors, and they all play different roles depending on how they get compensated. It is crucial to ask if your advisor is a fiduciary, meaning that they are legally required to act in your best interest – not their own. How advisors get compensated also matters as it’ll help you identify potential conflicts of interest. For instance, make sure that commission-only advisors are fiduciaries. Otherwise, ensure that you fully understand the financial products offered before engaging their services.
18. Invest more in bonds than stocks as you age
Age should not be the sole factor in determining your asset allocation. In deciding how much to allocate to various asset classes, consider your long-term goals, risk tolerance, and overall net worth composition. If you have a more significant percentage of your wealth in alternative investments such as real estate, your portfolio can be more aggressive in the stock market. There is no one size fits all.
19. The stock market is too volatile
Over the short term, the stock market can be volatile, and it is also essential to keep in mind that returns are not guaranteed. However, risk and volatility depend on the type of investment you choose. Over the long term, the stock market tends to rise and has proven to be one of the most powerful ways to build wealth.
20. Sell when the stock market goes down
If you’re investing long-term, it’s often a better course to do nothing when the stock market goes down. Even after the great recession happened, the market recovered in just five years. If you sell your investments, you lock in your losses and miss out on potential market rebounds.
21. You have to be more active and involved in investing to make more money
In investing, less is often more. You’ll make more money when you trade less frequently. When buying a stock, carefully consider the fundamentals of the company to ensure they are sound. The more you try to trade to beat market results, the more likely you will end up in a worse situation. Invest in quality stocks and leave them alone.
22. You have to know when it’s the right time to buy and sell
One of the most common investing myths is knowing when to get in and out of the stock market. It’s almost impossible to predict outcomes. The length of time you consistently invest your excess money is a far more critical factor. Start as soon as you can and for as long as possible to achieve the best outcomes.
23. Gold is the best inflation hedge
Inflation is a primary concern for many investors. A good inflation hedge should be an investment that either holds or increases its value over time. Such an investment would rapidly grow along with the rapid increase in consumer prices. However, gold hasn’t proven to be the best inflation hedge; the record has been inconsistent.
24. Fast-growing companies make great investments
A fast-growing company isn’t an indication that it will do well in the future. If you want to invest successfully, always consider the fundamentals of the companies in consideration. These should include the companies’ relative strength in the industry, earnings growth, debt-to-equity ratio, price-to-earnings ratio, and quality of the management.
25. Investing in the stock market is only for retirement
Most investors maximize their retirement accounts, such as 401(K) or RRSP, and end up with the rest of their money sitting in a checking or savings account. The vast majority of those funds should instead go to traditional investment accounts. Investing in non-retirement accounts gives you more opportunities to grow your wealth to fund short-term and long-term financial goals.
26. Your stock allocation should be 100 minus your age
Focus more on goals, then decide on your asset allocation. Following the “100 minus your age” rule might slow down your financial goals. Determine your asset allocation amounts depending on your risk profile and the timelines of your financial goals.
27. Past performance guarantees future returns
Past performance doesn’t indicate future results, as past performance only shows you what occurred over a previous period. However, if a stock has shown consistent growth for almost 40 years, it might be a good sign, but it’s not a guarantee.
28. Accumulate stocks on every dip
Knowing the difference between a quality stock correction, a cyclical stock correction, and a worthless stock crumbling is most important for long-term investing. You can add high-quality stocks on dips but avoid volatile and speculative ones.
29. Famous blue-chip stocks are always a safe bet
Depending on blue-chip stocks alone can be risky. They can drag down the market index in a bull market. They can also suffer from poor management practices and lose market share to smaller companies.
30. “The right” investing age
There’s no right age to start investing. You should invest as early as possible since compounding interests over long periods of time offers you great rewards.
31. Retirees should not be in the stock market
Whether retirees should invest in the stock market depends on various factors. Such factors may include the individual’s wealth situation, risk tolerance, and current market conditions. The traditionally recommended fixed-income investments for retirees may not be the best way to preserve capital in a low-interest environment.
These are just a few of the many common investing myths. Don’t just stop here in learning valuable investing and financial management information. Prioritize financial education in your life to have money working for you instead of the other way around.