The art of investing takes discipline, time, and patience. Unfortunately, many people fall victim to investing myths, whether in the stock, bond, or commodity markets. Unfortunately, this can prevent new investors from adding to their wealth. Some of these myths can make new investors believe that quick cash is right around the corner.
It is time to debunk these investing myths so you can worry less when it comes to investing.
Below are some of the most popular investing myths that can break the bank and discourage new investors from entering the investment world.
Investing Myth #1: You Need a Ton of Money to Start Investing
A common investing myth is that you need a lot of money to start investing. However, in the days of digital technology, various platforms will allow you to start investing with as little as $5.
Robinhood allows users to buy fractional shares rather than purchasing an entire share of a company. The fractional share feature helps users start investing without needing a lot of capital. Robinhood is a discount brokerage that pioneered commission-free trading of stocks, options, and cryptocurrency through its website and mobile app. The company has no storefront branches and operates entirely online without fees.
These days, commission-free trades are the industry standard among top online brokerages. Furthermore, most online brokers don’t have a required minimum initial deposit either.
Another sure-fire way to invest small amounts is by putting your money to work through a Robo-advisor platform. You can begin investing with as little as $5 on some platforms. Robo-advisors are low-cost automated investing services that use computer algorithms to build and manage your investment portfolio. They usually have no or a low minimum requirement. Robo-advisors let you start investing within a few minutes at minimum cost. They have proven that the investing myth that you need a lot of money to start investing is not true.
Investing Myth #2: There Is a High Correlation Between Past Returns and Future Returns
Some people believe that if a stock has performed well over the last few years, it is a safe investment and is guaranteed to perform well in the future. Furthermore, they believe that stocks that have performed badly in the past will keep performing badly in the future. Unfortunately, this is a common investing myth, and this is not always true.
When researching a stock or other investment, evaluating its past performance should be an important part of your analysis. It is best to go back at least 10 years or longer if possible to get a good handle on the company’s long-term stability. However, the investing myth that past performance guarantees future performance is not always true. Past performance is only part of the puzzle.
Understanding why a company performed well or poorly is key to your investing success. For example, did the company accept a new round of financing? Did it develop a new product for future revenue growth? These are just some questions that you should ask before making a decision.
After you have figured out why the company has been so successful, the next thing is to look at its prospects. What is the company’s financial situation? Have they spent money on R&D? Are there new products in the pipeline in the future? How is the current macroeconomic situation? Maybe a new competitor has entered the market with superior technology? Assessing a company’s future finances and success should be crucial to your analysis before investing in it.
An example of a company that always performed well but unexpectedly declined quickly is Kodak. Kodak was the market leader and held a dominant position in the photographic film industry for decades. The company was added to the Dow Jones Industrial Average index in 1930 and remained on the index until 2004. However, the main reason for its demise was its complacency when disruptive developments encroached on its market. Although Kodak actually created the first prototype of a digital camera in 1975, they, unfortunately, did not see that digital photography was not an extension of their printing business but actually was a replacement for their business.
There are many factors to consider before selecting the right investment. However, considering past returns without analyzing a company’s prospects and financial situation is not a great way to predict its future success.
Always remember, there are no guarantees in the investing world.
Investing Myth #3: Investing in Single Stocks Is the True Way to Wealth
The media and analysts sometimes get overly excited about a particular industry or stock they believe will skyrocket. Wallstreet will be filled with buzz about this particular stock that is believed to be the hottest thing on the market or the best investment out there. This will often convince people to jump on the bandwagon and invest in this stock without doing their own research, only to find out that the prediction was wrong. Too many people buy the stock, then it will get overvalued, and eventually, the price will come crashing down.
Generally, placing all your eggs into one basket is a recipe for disaster in the stock market and an investing myth that needs to be debunked. The number of individual investors who have gotten rich by buying just a single stock is very small. Analyzing individual stocks is usually a job for trained professional fund managers and investment brokers.
Stock picking is difficult, and it takes a lot of knowledge and in-depth fundamental analysis to maximize your returns. Besides, emotional reasons make it hard to stay objective and sell a stock that has done well in the past. Even as the justification for hanging on to it is long gone. Thus, when a recently purchased stock starts falling soon after its acquisition, investors often believe that the stock price will go back up even though there is no justification for such a move.
A less time-consuming and less risky strategy is to create a diversified portfolio of different asset classes. Such a portfolio can include low-cost ETFs and index funds in different sectors and industries, bonds, commodities, and Real Estate Investment Funds (REITs). Successful investing includes regularly rebalancing your asset allocation and portfolio diversification to adjust for circumstances. The goal is to ensure your portfolio is still on track to meet your financial goals.
If this all seems too complicated, it might be a good idea to hire a financial planner or investment advisor. They can create a diversified portfolio for you that includes retirement accounts such as IRAs and other types of investments to get you on the road to long-term financial success.
Investing Myth #4: Believing That You Can Time the Market
Some successful investors believe that they can time the market and use bear markets or market downturns to make a profit. This refers to buying stocks at a low price and selling them later at a higher price. Sometimes they get lucky and buy at rock bottom prices and turn a quick profit when the market improves. However, at other times, the market drops even further than expected, and no recovery is in sight in the short term. Then, they have to hold on to the stock for a long time to realize a gain or sell the stock at a loss.
One of the most common misconceptions and investing myths is the belief that you can time the market. No one can consistently time the market. Sure, sometimes it might work out, but more often, it does not. Unless you can predict the future, it is impossible to know when to buy or sell a particular asset. Believing that you can time the market is a risky game to play, especially if it concerns your life savings.
A better strategy to follow is the dollar-cost-averaging strategy. This investment strategy aims to reduce volatility by investing a fixed amount at regular intervals into the same equities, regardless of what the financial markets are doing.
If you feel the need to play the game of trying to time the market and “buy low/sell high,” only use a tiny percentage of your portfolio. Preferably use money that you do not really need and is not crucial to meeting your long-term financial goals. Over time, you will realize that timing the market is challenging, if not impossible.
Investing Myth #5: If a Stock Is Trading at an All-Time Low, It Is a Good Time to Buy
This is one of the most dangerous investing myths out there because the stock price does not say anything about the stock’s actual value. A $2 stock can be ridiculously overvalued, while a $2,000 stock can be largely undervalued.
Often after a stock has been sold off and its price is at an all-time low, people assume that it is undervalued and will be a good investment. Sometimes this can be true, but often there is an excellent reason for the sell-off, such as a company has lost its competitive advantage or its costs have increased significantly.
To find the real value of a stock, you need to look at its historical, current, and projected profitability, stability, and other fundamentals. But, of course, a stock’s price is only part of the equation. The ultimate goal is to buy stocks at a reasonable price when compared to their intrinsic value.
Investing can be complicated, and wrong opinions, common investing myths, and misinformation can really hurt your investment success, especially when you are a beginning investor. Educating yourself will help you separate fact from fiction and will prevent you from costly mistakes.
Please remember the following common investing myths that we busted; you need a lot of money to start investing, past returns guarantee future returns, single stock investing is the best way to get rich, it is easy to time the market, and a stock that is at its all-time low is always a good buy. None of them are true, and we have shown facts to prove it!
If for some reason, you still feel uncomfortable making investment decisions yourself, you can always hire a financial planner. They will help you create an investment strategy to reach your long-term financial goals.
The Psychology of Investing by John R. Nofsinger is a great book that discusses how psychological biases inhibit one’s ability to make good investment decisions.