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Debunking Popular Myths About Investing In The Stock Market
Planning for retirement can be a daunting task. But don’t worry. Everyone’s an investing expert, and they’ll happily share their expertise with you! (Just kidding). While the people around you might mean well, they’re often just repeating myths – some good, some bad.
Some will tell you to invest every dime in the latest overhyped meme stock. In contrast, others tell you the whole thing is a corrupt, white-collar casino, and you’re better off burying your money in the backyard. As with most myths, the truth is somewhere in between.
In this article, we’ll break down nine of the most common stock market investing myths to help you make the best possible decisions for your financial future. Let’s dive in.
Top 9 Investing Myths Debunked
While we obviously think stock market investing is a great idea, it’s ultimately a choice you’ll have to make yourself. But before you decide, it’s important to understand what stock market investing is and dispel any myths that might be affecting your judgment.
Myth #1: Stock Market Investing Is Only for the Rich
It used to be, but not anymore.
In the past, investors depended on financial advisors’ (expensive) services to gain market access. Investors bought stocks in large blocks, diversification was costly because mutual funds didn’t exist, and trade commissions were much higher.
The system wasn’t for an average person to regularly invest modest sums for retirement. Instead, it helped wealthy people protect and grow large amounts of excess cash. In short, it was a rich man’s game.
But times have changed. Specialized retirement accounts, mutual funds, exchange-traded funds, electronic trading, and the banning of fixed minimum commissions all helped make stock market trading more accessible to regular people.
Everyone can now reap the same benefits that only the wealthy elite used to access. With freedom comes risk, of course, but at least we are free to choose for ourselves.
Myth #2: You’re Too Young to Start Investing
A common misconception is that investing is pointless if you’re young and broke. Nothing could be further from the truth. When it comes to the stock market, the most critical factor is time. The younger you are, the more time you have; the longer you invest, the more you benefit.
While more is better, even modest amounts of money will grow and compound over decades.
For just $25, you could buy a share of a total-market index ETF. You can do that once per month for only $300 per year. Factoring in 10% growth, you’ll have more than $50,000 after 30 years – for just $25 a month! The hard part is having the discipline to save that $25.
And while money grows exponentially, so does knowledge. Investing early can help you learn about how the market works. You’ll learn how to use basic financial information and make trades through an online broker.
Later, when you have much more money to invest, you’ll already understand how the process works.
Time is your ally, so start as young as you can.
Myth #3: You’re Too Old to Start Investing
Every investor wishes they had started sooner. While time is the investor’s best friend, you can still benefit from investing at any age. Your strategy will be different than a younger person’s, but you can still reap some benefits before retirement.
Many older people think they can’t afford to risk their money as they near retirement. We agree for the most part. But that doesn’t mean you should keep your life savings in cash. Even in a bank account, interest rates don’t keep up with inflation. Your money is losing value.
Unless you need the cash within the next 12 months, you’re better off investing in ultra-safe bonds or bond funds that offer much higher returns than your bank for minimal risk.
Plus, the financial system is on your side. Tax-advantaged retirement accounts allow for notable “catch-up” contributions for older investors. If you’re over 50, you can add an extra $6500 to your 401(k) and $1000 more to your IRAs annually.
While you can’t make up for lost time, you can still do a lot to safeguard your financial future and prepare for retirement.
Myth #4: Popular Companies Make Great Investments
Sometimes, but not always.
A common myth (or just lazy analysis) says that the easiest way to invest is to think up some popular companies you’re familiar with and invest in those stocks. That is a bad strategy.
The problem with popular companies is that they’re popular! Everyone already had the same idea you have. And the price increases when everyone buys (or wants to buy) the same thing. Now, the price reflects the stock’s popularity rather than the company’s fundamentals.
Let’s look at Tesla (TSLA) to understand this in more detail. The stock currently has a price-to-earnings (P/E) ratio of around 60, which means the price is 60 times higher than what they earn. In other words, the stock becomes overvalued.
Generally, overvalued companies are riskier buys. We’re not arguing that Tesla is a bad company (or even a lousy stock). Based on economic fundamentals, the stock price is high compared to how much money they make.
How does Tesla end up overvalued? Because you’ve heard of it. Tesla is an exciting company making incredible technology run by the world’s wealthiest, most famous man. However, that doesn’t mean it belongs in the retirement portfolio of a beginning investor.
Determining stock value and making picks is a complicated business. An entire industry exists for this very task. But the broader point is you probably shouldn’t be buying individual stocks – popular or not.
Unless you want to be a pro, it’s best to leave stock picking to the experts and focus on investing in diversified funds that support your retirement goals.
Myth #5: Follow the Hype, Find the Money
Almost always false.
Trying to game the market is a risky business with no place in the strategy of a serious long-term investor.
Investing is not about trying to pick winners and avoid losers. Nobody knows what will happen in the short term. Investing is about choosing a little bit of everything and accepting you will have both winners and losers – with the winners canceling out the losers over time.
Sometimes, people do the same thing when donating to politicians. They don’t try to pick the winner. They just donate to both candidates. Why? Because they don’t know (or care) who wins, they know someone will win, and it’s best to hedge your bets.
The problem with following the hype is that you’re not a pro with your thumb on the pulse of the market. By the time you’re aware of the hype surrounding the next big thing, it’s already too late. Getting involved at this point is a quick way to lose your money.
Instead, forget hype and emotions. Set a strategy, stick to it, and watch your portfolio grow slowly. If that sounds boring, it’s supposed to be – that means you’re doing it right.
Myth #6: You Will Get Rich Quick Investing in Stocks
Only if you are also willing to get poor quickly, too.
The key thing to understand about “get-rich-quick” schemes is that they’re also a great way to “get poor.” people get rich quickly in the stock market all the time. It happens. People get rich in casinos or playing the lottery, too. But the odds are against them.
We just usually only hear about the winners.
Reward in the market (or anything else) is directly proportional to the risk you’re willing to take. Risk big, win big. Risk small, win small. No matter what, we have to risk something to get a reward. In the market, that means risking some combination of money and time.
For traders who “get rich quick,” it’s usually their full-time job. They must take huge risks and spend countless hours studying financial data and company news. And if you want to take a considerable risk without data and research to back it up, you’re better off just going to the casino.
Long-term investing can make you rich, but it won’t happen overnight. The disciplined application of a long-term strategy is the lowest-risk way to get the highest rewards. The tradeoff is that it takes a long time.
Myth #7: You Can Find 100% Risk-Free Investments
As we said above, without risk, there is no reward. By definition, a risk-free investment would produce no profit.
Even ultra-safe investments like government bonds carry some minor risks. If interest rates rise, your bond might remain locked into a lower rate. Or, the government could collapse – unlikely, but possible. You’re paid profits for taking on this risk. No risk, no gain.
There is a greater risk the junk bond won’t be able to pay, and you’re rewarded for accepting that risk. And the more risk you take, the higher the profits. That is why junk bonds pay higher returns than government bonds.
Even with all your money under your mattress, you’re risking the loss of value due to inflation. That is just how money works. All we can do is manage that risk and figure out exactly how much we can tolerate.
If someone offers you a 100% risk-free investment, run away. They’re lying.
Myth #8: Stock Market Investing Is Like Gambling
It can be. That’s up to you.
The stock market is a complex system that will always reflect the strategy of the individual investor. Whatever you want to use the market for, there are opportunities.
If you want to invest long-term in the safest way possible, you can. If you’re going to do a little day trading and a little investing, you can do that, too. If you want to gamble away your life savings, the market will be happy to take your money.
Your experience depends entirely on the strategy you use and the choices you make.
In a way, the market is like a knife. Is a knife dangerous? That depends. Is it in the hands of a master sushi chef or a hyperactive 5-year-old? A knife is just a tool. What a knife means, and the danger it represents depends on the user and the context of the situation.
The stock market is the same. We decide whether it’s a wild casino for gambling adrenaline junkies or a stoic institution for long-term investors.
However, the market differs from a casino in one fundamental way: time. In a casino, time always favors the house. Play long enough, and the house always wins. But the stock market is the opposite. The longer you play, the more time favors the individual investor.
Myth #9: You Must Be a Financial Expert to Invest
After all this talk about risk, it means we must be a financial expert to avoid it, right? Not exactly. Sure, if you want to be a day trader, you need to have expert knowledge about the market, stocks, company analysis, financial reports, economics, politics, etc.
But we’re not talking about day trading. We’re talking about long-term investing for retirement. The best, most basic long-term investment strategy can fit on the back of a business card:
- Contribute as much money as you can to tax-advantaged retirement accounts
- Invest that money in a diversified, low-risk portfolio (e.g., index and bond ETFs)
- Wait 30 years
- Retire rich
It doesn’t get any simpler than that, and it certainly doesn’t require you to be a financial expert. As we said, a solid investment strategy is boring, and sticking to it requires more personal characteristics like discipline and resolve than technical expertise.
Regardless, you will inevitably become an expert if you have real money in the market. The point is that you don’t have to be an expert; you need to start, and you will learn everything you need to know along the way.
Don’t Let These Myths Stop You From Investing
We hope this article cleared up some confusion about these investing myths.
It’s normal to find this process daunting and scary, and if you decide investing isn’t for you, that’s fine. But don’t turn away from investing due to some unfounded myths. Armed with real knowledge, you can make informed decisions about what’s best for your financial future.
As you can see, many of these myths can be valid under the wrong circumstances or become true when investors take on too much risk. The more you deviate from a sound, long-term investment strategy, the more you expose yourself to the risk that will tank your savings.
In a sense, how true some of these myths are is up to you! If you want to get started investing, the first thing you need is a trusted source of information. Check out our site to learn more about Stock Market Eye, our reliable, secure portfolio tracker.