7 Investing Myths Debunked
- Trading commissions are lower than ever and there are literally hundreds of stocks, exchange-traded funds and mutual funds that can be bought free of commissions.
- While holding investments over the long run can reduce the impact of short-term market swings and mitigate emotional decisions, you shouldn’t buy a stock and then just close your eyes.
- You could sign up for a robo-advisor, or simply start by putting your money in a high yield savings account where you can make a real rate of return on money.
By now you’ve probably heard that investing is a good thing. You might even have been told that it is the easiest way to build wealth. Yet, despite all the positive news you hear about investing, you still have some lingering doubts preventing you from making your first investment.
Maybe you’ve heard too many stories about family and close friends losing all their money during the 2008 financial crisis, or maybe you’re terrified of words like “stock market volatility.” (That just means the prices of companies in the stock market are changing rapidly.)
Either way, while you mull over whether to start investing or not, your money is barely growing in your traditional low interest savings account and you’re missing out on the power of compounding.
Below are some investing myths debunked in order to get you investing.
1. Only For The Wealthy
Do you think that investing is only for people with a lot of money to invest? Maybe that was true many decades ago, but not today! Before, in order to start investing, you either needed a stockbroker or a financial planner, who usually came with a steep price. However, investing has never been more cost-effective as it is at the moment.
Trading commissions are lower than ever and there are literally hundreds of stocks, exchange-traded funds and mutual funds that can be bought free of commissions. In fact, late last year, a number of brokerage firms (institutions that help you buy and sell investments) all reduced their commissions to zero for online trading. Better yet, a majority of these firms don’t require an account minimum!
Similarly, robo-advisors are a good place to start investing, especially if you don’t have a lot of money because they charge very low fees and most don’t require an account minimum.
By investing what you can early, you have the potential to grow your savings into something much larger over time. Imagine, for instance, a $300 investment that’s able to grow at 7% a year. In 40 years, that could turn into more than $4,492. Invest $3,000 under the same circumstances, and that’s more than $44,900. So, what are you waiting for? Don’t let the size of your wallet stop you for investing!
2. Very Risky
These days, whenever I tell people that I started investing, their first comment is usually something like, “so you like to take on risk, huh?” In a way, most people are right when they think of investing as being risky, but this is only if you think of short-term investments.
Certainly, if your timeframe for investing is less than 10 years, or you need the money in the next few years, then it is sometimes risky. This is especially so given that stocks fluctuate and sometimes you can lose a lot of money in a short period of time.
However, if you invest with a long-term view, the risks are reduced and there aren’t as many fluctuations. In fact, diversifying and spreading your cash across multiple stocks or bonds can also lower the risk.
When investing, try to have a long-term outlook, 10 to 30 years. When you do this, you notice that the long-term growth of stocks and bonds far outstrips the returns your money would generate just being in your savings account.
In fact, although the stock market can be volatile, history shows that investing almost always pays off: Over the past 90 years, the average annual return for the S&P 500 is over 9%!
3. Only For The Super Smart
Investing can be complicated and maybe you’ve heard that you need to be super smart to do well. While investing professionals might want you to think that to be true, it is definitely not the case.
There are numerous ways for you to begin investing. If you choose to do so yourself, you can register with a brokerage firm and invest your money in an exchange traded fund that track the performance of a certain index. ‘ETFs,’ or Exchange-Traded Funds, are pooled collections of investments, like stocks, bonds, or commodities. Like mutual funds, ETFs are packaged to allow investors access to a group of securities, offering more diversification than you’d get by buying, say, one company’s stock, or bonds from one issuer.
Or, you could sign up for a robo-advisor, or simply start by putting your money in a high yield savings account where you can make a real rate of return on money.
4. Investing Is Basically Just Gambling
Probably the biggest reservation people have about investing is that you’re not always guaranteed to make a return on your money.
Just like gambling, sometimes you make money and other times you lose money. However, unlike gambling, over time, a diversified portfolio makes investors richer.
Also, unlike cards and dice, when you invest, you are investing in something real. You are betting on the productivity of the businesses in which you invest. As a shareholder, you are a part owner of the company. You may be entitled to a share of the profits in the form of dividends, and you can share in the growing value of the company if increasing productivity leads to increased market value (as it often does).
5. “Buy And Hold” Is The Way To Go
Many investors are taught that the best strategy is to buy and hold forever. While holding investments over the long run can reduce the impact of short-term market swings and mitigate emotional decisions, you shouldn’t buy a stock and then just close your eyes.
Sometimes, good companies fall out of favor or economies change. This can adversely affect the growth prospects for a company and depress its stock price.
Also, your financial circumstances and needs may change over time, requiring adjustments to your holdings. It’s always a good idea to review your portfolio and financial situation a couple of times a year. That way, you can adjust when your situation changes or when your portfolio’s drifted too far from your pre-set targets.
Don’t turn a blind eye to your investments, but at the same time, try not to emotionally react every time they rise or fall.
6. Always Buy At Or Near The Low
Hoping to buy a security when it’s ready to rise from a low point is only natural. Buy low…sell high, that is probably the number one thing people will tell you about investing. The problem is: It’s much easier said than done.
When you buy a stock whose price is low, you’re essentially making a bet that your investment will turn things around.
However, if the price of the stock is already at a major low, is it reasonable to think that you’re going to be able to predict the bottom? Rather than investing a large amount of money at any one time, consider spacing out your purchases, a strategy known as dollar-cost averaging. This can help reduce the risk of buying too high—or of buying too big a stake in a stock that never recovers.
7. Safe Investments Are The Way To Go
Often, when you finally decide to invest, the first thing someone says is that they hope you’re investing in safe assets.
While these investments might be safe, they often offer very small returns compared to those available in bonds, stocks, or other risky assets.
To most people, safe investments — like bank savings accounts, CDs and money market funds — mean that they are “safe” from losing money or declining in value.
Nonetheless, if you are saving for a long-term goal, like retirement, investments with low returns risk the prospect of losing purchasing power to inflation as a result of playing it too safe with the money.