The Six Biggest Myths of Investing
If you've never invested before, you might think it's only for billionaires and tycoons...
However! Investing is one of the most productive things you can do with your money to improve your financial situation and grow your wealth over time regardless of your age or starting point. When the facts are separated from the myths, investment becomes more accessible than ever. If you look past the stereotypes, you might well find that it's the right fit for you.
Let's look at some of the common misconceptions about investing.
Myth # 1
“Investing is like gambling.”
Although both poker and the stock market require money to be risked and lost, there is one significant difference between the two. For instance, in gambling, you have limited information to make your decisions by design because having said information is against the rules and would give you an unfair advantage.
For example, when playing poker, you can't move around the table and look at the cards your opponents are holding. You can't check to see how many cards are left in the deck from the dealer's seat. You are blind to the details that could provide you with more complete information and boost your chances of winning in a game of poker. By contrast, with investing, informed decisions are not against the rules, but rather are the key to success in the stock market. Almost all experts recommend gathering as much information as possible before considering an investment. In actuality, it all depends on your investment philosophy. If you get your ideas from Reddit forums and meme stocks, it’s likely closer to gambling than investing.
Investing returns are more driven by asset allocation than individual security selection. This may sound like financial jargon or gibberish. But, in layman's words, thinking about what asset class you buy, such as stocks, bonds, real estate, commodities, cash, and so on, will have a greater influence than attempting to say, "This is the best stock versus another."
For example, where would you find the next Amazon or Google? Well, there are going to be outliers and big winners. That's always the case. But different asset classes are going to help. The year 2022 is a great example, where you have commodities up 30%, which is fantastic in a world of higher inflation. Then you have stocks that are officially in a bear market. For example, look at the S&P 500; it’s down by 20%.
“Market timing is risky, tricky, and hard.”
This is somewhat true, but there are systems and processes that investors can examine. Trend following and momentum, for example, are two academically validated risk-reduction strategies.
It's no longer, “I believe I should do this; I'm going to sell it today and repurchase it later.” There must be a system, just as there must be regulations and a strategy. For example, you decide what investments you’ll allow yourself to make. Determine the types of investments you are happy to make, and those that you won’t make. For example, will you invest in speculative mining stocks, or stick to big, well-established companies only? You can revisit your investment objectives over time and adjust accordingly based on your skill level and risk appetite. Having a strategic plan can help to reduce emotional or rash decisions. In actuality, timing the market is difficult, but having a process is not.
“The more stocks you own, the more diversified your portfolio will be.”
To some extent, this is correct. You may limit some of the company specific risk, but the key is how uncorrelated the stocks are with one another. In other words, how do stocks react to varied market conditions? Correlated equities move in the same direction and uncorrelated stocks move in opposing ways. A portfolio of entirely high-growth tech stocks, for example, would lack diversification because they would generally move in lockstep. This may boost your earning potential in tech-friendly economies, but it also can drastically increase your risk because all of your eggs are in one basket (the tech basket).
The idea of having a diversified portfolio is to divide your money over different asset classes (stocks, bonds, real estate, etc.) so you can make money in practically any situation.
What does portfolio diversification entail, and why is it important?
An investor's overall risk profile is decreased by a diversified portfolio, which consists of a variety of investments. Owning stocks from a variety of various sectors, nations, and risk profiles as well as other investments like bonds, commodities, and real estate are examples of diversification.
“Percentage gains and losses are the same.”
They are not, and you can easily be tricked by this. Here’s why. If you think about it, there's the idea that losses impact an investor twice as much as gains. For example, you may think ,"if I'm up, I'm fine; if I'm down, I'm really miserable." But there may be instances where, to return to flat, there may be a 40% loss followed by a 67% gain. This example shows that it is not down 40%, up 40%, or flat. You'll still be down from that vantage point.
As you can see, understanding percentage gains and losses over time is critical since it allows you to calculate your rate of return, or net gain or loss over a given time period. The challenge is thinking that they are equivalent when you do the math.
“Investing is for the rich.”
When people hear the word "investment," they immediately think of stock picking and day trading, as well as large sums of money. Anyone who has put even $20 into a retirement account has already begun to invest." Many brokerages now offer fractional shares, which allow clients to invest as little as $5 in a stock of their choice, allowing you to share in the same percentage gains as someone with more money to invest.
As stated in myth #1, investing should not be like gambling. If you're just getting started, choose something that feels like a continuous and steady contribution. Because of the way the monetary system is set up, the amount you can get with a savings account isn't comparable to the amount you can make by investing that money instead. You must invest in order to move forward and achieve your objectives.
“$1 today is not the same as in five or ten years; you need a lot of money to start investing.”
It's absolutely not true. It is an assumption that to be a successful investor, you must have a large sum of money. This is completely false. You don't need a million dollars to get started investing properly. It's not even necessary to have $1,000. All you need is a small stake and the right level of confidence. You can start with a tiny automatic payment to begin the snowball rolling, but early saves will be far more crucial. You should invest early and invest often!
Saving anything in order to grow savings levels, will be much more crucial than investment results early on in your investing path. Moving from a 10% to a 20% return isn't going to make a tremendous difference if you're focused on investment returns and you have $5,000. Yes, the investment return counts a lot more if I have half a million or a million dollars.
Investing isn’t as complex, time consuming or risky as you may assume. We, at Vincere Wealth, can help you put together an investment portfolio that suits your financial needs. And the younger you start, the more time you have to build your wealth over the long term.
Ready to start? Talk to our financial advisors today. Get in touch with us.
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