investing myths

Investing Myths: Know the Difference Between Fact and Fiction

Investing is a topic that excites and scares people. It is also a subject where good and bad advice is rampant. Most of the bad advice is driven by common investing myths.

Understanding the difference between fact and fiction is essential because retirement success depends on successfully understanding how to invest for the future. However, investing myths often leads people down the wrong path. As a result, they make mistakes with significant consequences on their net worth and retirement portfolios.

Let’s examine a few of these popular investing myths and put them to rest.


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Common Investing Myths

No. 1 – Saving is Investing

Many people think if they are saving, they are investing, but that is a myth. The two options fundamentally differ in how one deals with money. Furthermore, the mindset of these two activities is different. Saving is an inherently pessimistic activity where you save for an uncertain future, like building an emergency fund. On the other hand, investing is a more optimistic activity, focusing on a more hopeful future.

Saving

Saving is the difference between earnings and expenses. So, if a person earns $50,000, has $40,000 in expenses, and banks the rest, they save $10,000. The main advantage of saving is the money has low risk and is thus perceived as a safe retirement investment. Products like regular savings accounts and certificates of deposit (CD) are insured by the Federal Deposit Insurance Corporation (FDIC). As a result, the principal is not at risk, but total returns over long periods may be low.

Investing

On the other hand, investing is putting your savings into an asset that may appreciate or depreciate. Your initial investment or principal is at risk. The Financial Industry Regulatory Authority (FINRA) defines investment risk as “…any uncertainty with respect to your investments that has the potential to negatively affect your financial welfare.” 

For instance, the price of a stock can rise or fall depending on economic and market conditions. The same holds for other asset classes, including bonds, real estate, gold, REITs, cryptocurrencies, etc. Investments have a risk versus reward trade-off and a potential for principal loss. 

Hence, saving and investing are fundamentally different; the myth is you should choose between the two. But a person should do both.

No. 2 – Investing Should be Exciting

Some people think investing should be fast-paced, fun, and exciting. 

For instance, day traders enjoy market volatility and make money on the ups and downs. Granted, some traders make money trying to averaging down in short-term trades. But most people, especially beginners, lose money.

For most people, investing should be boring, like a slow-and-steady horse plodding along. It is not exciting, but eventually it gets there.

Strategies like dividend growth or indexing investing meet this requirement. They are simple to understand, and there is no need for access to real-time data. Many dividend millionaires have been created in the past by inadvertently following dividend growth investing. Today, people are following both strategies to achieve financial independence.

The bottom line about investing is patience and discipline with a plan that can work.


No. 3 – Investing in the Stock Market is Too Risky

Another investing myth is the stock market is too risky.

Yes, when investing, there is always a possibility of permanent loss. Companies go bankrupt, shares become worthless, or corporate bonds are valued at pennies on the dollar. However, investing has varying degrees of risk.

Day trading and a few other strategies exist on the very high-risk end of a risk scale. But risk decreases as we progress to safer strategies, like dividend and index fund investing. Investing always involves the probability of loss, but some strategies can provide a less volatile experience.

In the case of index funds or ETFs, they own a basket of stocks, providing diversification. A single company represents only a small part of your portfolio. An investor can diversify more by owning different asset classes, like value, growth, and REITs. Moreover, diversifying out of stocks into uncorrelated assets like bonds, cash, and gold may further diversify the total portfolio, lowering volatility.

Lastly, some studies suggest buying and holding shares for long periods lowers the risk of permanent loss. People who have been through bear markets, like the dot-com crash and Great Recession, have recovered their unrealized losses and gained. A long-time horizon paid off.

The bottom line is to understand the risk and make educated decisions.

No. 4 – You Need a Lot of Money to Start Investing

Investing myth number four is you need a lot of money to start investing. The stock market is not just for the rich. That sentiment used to be true in the past. High brokerage fees for placing a trade and investing minimums meant buying stocks was out of reach for many people.

However, most trades are commission-free now. Likewise, investing minimums have decreased. Today, a person can purchase a single share of a stock or ETF. In addition, exchange traded funds (ETFs) have rock-bottom expense ratios and often low minimums.

Furthermore, the Federal Reserve Survey of Consumer Finances from 2019 shows approximately 53% of American families own stock. The percentage is probably higher today. If more than 50% of the United States adult population is investing, it is not just those in the top 1% net worth.

The bottom line is more Americans invest today than in the past because the costs and minimums are lower.

No. 5 – The Stock Market is Like Gambling

This investing myth does not make sense once you analyze both. But on the surface, the stock market and gambling have one similarity because both have a risk of loss that is difficult to quantify.

However, in gambling, one person wins while another loses. This fact is inherently unlike investing, which aims to share a part of a corporation’s profits. Additionally, gambling is a losing proposition over long periods because the odds are stacked against you. The longer you gamble, the greater the probability the house wins, and you lose.

On the other hand, an investor has a better chance for success over time in the stock market. On a daily basis, returns are not predictable. However, research has shown a diversified portfolio over a long-time horizon has a greater chance of success.

No. 6 – Too Young or Too Old to Invest

This investing myth likely keeps many people on the sidelines. A young person thinks they have time, while an older person may feel they do not have enough time to attain a solid return.

But more time is an advantage for people completing college. They can start with a smaller amount and increase it annually, leveraging the power of compounding over decades to retire with a substantial nest egg. The two most significant factors for success are time and annual contributions.

Older people may have less time and wish they started earlier. But starting late when saving for retirement is a manageable hurdle with a sensible strategy. Investing makes sense unless you need the cash in a year or less, especially considering the tax advantages in retirement plans.

No. 7 – Timing the Market Is Easy

The last investing myth in this list is widely held and persistent but inaccurate. Timing the market is not easy and not necessary for success. Granted, some people occasionally have success in timing the market. But most people cannot do it consistently; in many cases, success is just luck. When timing the market, you must be correct twice when buying and selling.

Investors are better off researching a preferred strategy and staying the course over time. Steadily purchasing shares in a diversified portfolio monthly, regardless of the market’s short-term volatility, allows one to automatically dollar cost average (DCA).

The market is unpredictable, and timing the market successfully is almost impossible.

Investing Myths Thrive, but They Can Lead You Astray

Investing is an activity anyone can do. It does not take great intelligence but rather patience and the ability to disregard investing myths. People should research a strategy and stick to it over time, focusing on a diversified portfolio leveraging the power of compounding. Furthermore, they should avoid activities detrimental to building wealth and tinkering with an effective approach.

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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