There’s a lot of information about investing floating around. There are also a lot of bad opinions, misconceptions, and flat-out lies.
Knowing the difference between myth and reality is your ticket to hitting your investing goals. Here are 10 of the biggest myths about investing:
1. It’s Hard to Get Started
If you’ve never invested money before, it can seem intimidating — and you may not even know where to begin. But the reality is that it’s never been easier to get started with investing. It’s simple to open a brokerage account or Individual Retirement Account (IRA) online, and there’s a wealth of great information available to investors for free on the web. If you work for a company that offers a 401K plan, you are usually automatically enrolled. All you have to do is read up on the investment choices and decide how much money you want to put aside.
2. You Need a Lot of Money to Make a Lot of Money
There were days when stock brokers wouldn’t even take your calls unless you were willing to invest thousands of dollars. Nowadays, it’s possible to open a brokerage account and invest just a share at a time. Granted, transaction fees can make it worthwhile to invest larger sums at a time, and some investment accounts have minimum requirements — but you generally don’t need to be rich to get started. A modest amount of cash set aside at regular intervals can result in a big nest egg upon retirement. Consider that even a person making $30,000 a year and setting aside 5% of their income over 30 years will end up with more than $150,000, based on a 7% annual return.
3. It’s Overly Risky
Investing is not without risk, but you are fully in control of how much risk you want to assume. If you’re the skittish type, there are plenty of investments, such as bonds and dividend stocks, that will allow you to make money without much risk. And it’s important to remember that while stocks can go down in value quickly, they have historically always rebounded. Since the Great Depression, there have been fewer than two dozen down years for stocks.
4. The System Is Rigged
You will often hear this from critics of our financial system. I won’t suggest that our system is perfect, but to call something “rigged” is to suggest that the average person can’t succeed. The truth is that for the average person, it’s easy to buy stocks, bonds, and other investments in a straightforward and transparent way, and make money doing it.
5. Past Performance Indicates Future Returns
It’s tempting to buy an investment because it has done well in the past. And it’s generally true that if a stock has generated a solid return over a very long period of time, it’s a good bet moving forward. But there’s absolutely nothing to prevent an investment from tanking even after years of great returns. And it certainly doesn’t make sense to invest in something based on the performance of the previous few months.
6. Investment Professionals Know a Lot More Than You
I don’t want to disparage fund managers and analysts, but there is a growing body of evidence that no one, not even the most experienced professionals, can consistently beat the performance of the overall stock market. If you put money in an index fund that tracks the overall stock market, there’s a good chance you’ll do as well or better than the hotshots on Wall Street.
7. You Should Try to Get Stocks During an IPO
Initial public offerings get a lot of headlines, and it may seem desirable to get in at the ground floor. Examples abound, however, of companies that failed to come out of the gate strong. In fact, many companies have seen share prices dip well below IPO levels. (Facebook is the most recent prime example of this.) For most investors, it makes sense to wait after an IPO to see how things go. If you’re investing for the long haul, waiting won’t hurt you too much. In fact, you may even get a better bargain.
8. You Need to Have [Insert Investment Here] in Your Portfolio
You’ll get a lot of advice from people telling you that you need a specific type of investment to optimize your returns. But there is rarely a single investment that should be considered a must-have. There are a million ways to build a collection of investments that will help you get rich; the best advice is to diversify and have a long investment horizon.
9. Gold Is Always Great
You may assume that gold is an amazing investment. I mean, it’s gold right? And there has to be some reason there are advertisements for gold on TV all the time. The truth is that gold can be a great investment, but only at certain times. It’s worth having some in your portfolio to stay diversified, but gold has taken a beating recently. Shares of the SPDR Gold Trust are down nearly 15% in the last three years.
10. $1 Million Is a Magic Number
One would think that becoming a millionaire means you’re set for life. Not these days, however. Thanks to inflation and longer life expectancies, a million bucks may not be enough for most people to live long and retire comfortably. It’s a good sum of money, but if you want your money to last 25 to 30 years, you’re probably going to want double that — or even more, if possible. This means saving as much money as you can, as early as you can.
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