There’s a lot of bad investing advice out there.
The problem is that some of this advice is passed on as age-old investing wisdom, and commonly accepted as a fact, but following some of these investing myths can destroy your returns, or worse, cause you to avoid investing altogether.
So, if you are trying to build up some wealth and maybe even retire a bit early, you'll want to be aware of these ten myths we've debunked.
Myth #1: The Stock Market is Too Risky
If you’ve ever thought that investing in the stock market is too risky, it’s understandable. With financial news — and plenty of drama — available 24/7, it’s easy to get that idea.
But if you avoid taking undue risks and instead focus on investing with a diversified portfolio, for example, using index funds, you can get great returns over time.
The stock market has returned about 10% annually (on average) over the last 100 years. While the stock market can be volatile, over the long term it has not been as risky as you might think.
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Myth #2: You Need a Lot of Money to Invest
Investing in the stock market doesn’t require thousands of dollars or a high-paying job. Many money apps today let you invest with just $10 (or less), but you may want to pay down some costly debt first.
And that $10 can add up. If you invest just $10 per week for the next 30 years, with an average return of 10%, your money could grow to over $78,000.
But investing isn't without its risks. The markets don’t go up every year, and that 10% annual return is an average, so there will be some years when it’s much lower. Still, if you can withstand the ups and downs, you don’t need a lot to get started.
Myth #3: You Can Time The Market
In the age of speculative crypto investors and meme stocks, it can seem like everyone is getting rich by timing the market. All you need to do is buy when prices are low, and sell once they go up.
That might sound easy, but countless studies have shown that most active investors tend to underperform the market, and by quite a margin.
If you are trying to time the market, history shows that you will have poor returns versus just putting money into a well-diversified portfolio, such as an index fund, over time.
Myth #4: Losing 20% and Gaining 20% Are the Same Thing
The math on investment gains and losses is tricky. So it’s easy to see why you might think they are the same. But they aren’t, and not understanding this could cost you.
For example, if you have $1,000 invested and lose 20% in a week, you now have $800 left. If, during the next week, you gain 20% on your $800 investment, you now have only $960.
To get back to $1,000, you need to gain 25% to break even! This is a powerful concept and goes to show that losses can be more devastating, and trying to “make up for your losses” takes a higher return.
Myth #5: Buying Different Stocks = Diversification
Diversifying your investment portfolio is important to reduce risk while maintaining solid returns. But buying more stocks doesn’t necessarily give you more diversity, and could increase your risk.
Companies are exposed to their operating risks, but also to the risks of the industry they’re in, and to the economy as a whole. So if you are only buying different stocks in the tech sector, and the whole sector crashes, your tech stocks are all exposed to a high risk of loss, even if some of the individual companies seem solid.
But if you buy stocks in several sectors, and those sectors are unrelated (such as tech, healthcare, and energy), you can reduce your risk and add some diversity.
Myth #6: Investing Locks Your Money Away
For sure, some investments lock your funds away until a future date, for example, bank CDs (certificates of deposit) usually pay a higher rate of interest but require you to invest for a certain maturity.
And retirement accounts can’t be touched until retirement age, with few exceptions, without having to pay penalties as well as taxes.
But many investment accounts let you buy and sell stocks and other investments at any time, giving you access to your funds when you need them. Standard brokerage accounts are the most liquid investment account, and some platforms even let you borrow against your portfolio balance for quick access to cash.
Myth #7: You Need To Watch Your Investments Closely
With so many financial news channels and tons of investment updates throughout the day, you would think that “sophisticated investors” keep up-to-date on everything going on in the market.
But contrary to popular belief, great inventors don’t always watch the news. Simply buying index funds and ignoring financial news can be one of the best ways to grow your wealth.
Active traders typically underperform the market, and this is caused by checking the financial news and trading too often. So sit back, relax, and automate your investments for a more stress-free financial life.
Myth #8: Investing Can Make You Rich Quick
Some of the most popular news stories feature young millionaires that made their fortune trading meme stocks or crypto. And with the sheer amount of financial noise on TikTok and other social media platforms around trading, you would think that anyone can get rich quick through investing.
The reality is that most “get-rich-quick” stories are a combination of luck and … luck, and many who make money quickly, lose it even faster.
Investing is a long-term game, where you are better off being the tortoise than the hare. If you sprint, you could exhaust your money quickly, but steady investing over a long period of time wins the race.
Myth #9: Past Performance Indicates Future Returns
While it’s fun to look at stock charts and see how the stock has grown in price over time, it does not indicate that it will continue this trajectory into the future. There are way too many factors to assume that past performance will repeat itself.
If you buy something just because it has gone up in the past, you could be in for a surprise. Some stocks hit all-time-highs, and then plummet down, only to never recover previous prices.
Always do your research into an investment to ensure it is worth holding right now, and not just in the past.
Myth #10: A 401(k) is the Best Retirement Account
Your first introduction to retirement accounts might have been your 401(k) at work. You could send some of your paychecks there automatically, ignore it, and watch the balance grow over time.
But this does not mean that it’s the best investment account for you. Some 401(k) accounts come with high fees and a poor selection of investments. You want to make that contribution to your 401(k) to max out your employer contribution and your tax breaks, but you may want to have another retirement account as well.
Individual Retirement Accounts (IRAs) are a great option for retirement and typically come with lower fees and a much larger investment selection.
Common investing advice can hurt your returns, and simply accepting it at face value might cost you real money.
This can help you avoid bad financial advice and give you confidence as an investor for the rest of your life.
FinanceBuzz is not an investment advisor. This content is for informational purposes only, you should not construe any such information as legal, tax, investment, financial, or other advice.
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