5 Common Misconceptions about Investing

From books to podcasts to chat boards on Reddit, it seems like everyone is talking about investing nowadays, and as someone who consistently urges her community to partake in more money conversations, I’m thrilled!

Well, mostly thrilled. With the increase in conversations about investing also comes an increase in misconceptions about investing—misconceptions that can be difficult to identify, as they often contain a tiny bit of truth, making them seem thoroughly plausible. At first glance, these misconceptions may seem harmless or rooted in good intentions, but they can ultimately be extremely damaging to the investing experience of new and seasoned investors alike.

As a globally recognized personal finance and investing expert, I know that investing is so much more than a “get rich quick” scheme or something that is reserved for the suits and ties on Wall Street. Rather, it is one of the most valuable tools civilians have to prepare for their financial future and help protect themselves and their loved ones in the case of an emergency, so long as they have the information and tools they need to invest successfully.

Fortunately, you don’t have to navigate these investing conversations alone. I am breaking down 5 of the most common investing misconceptions so that you can confidently invest and develop a strong sense of discernment towards investing myths, trends, and practices that will serve you for decades to come.

 

“Investing is only for the rich because it’s not worth it unless you start with a lot of money.”

If I had a dollar for every time I heard this investing myth…well, let’s just say I would have a lot of extra dollars to invest back into the stock market.

The reality is that in the past when investing options were more limited, investing was definitely more accessible to the wealthy. But that is no longer the case today! There are now so many different types of investments at a wide variety of price points, making it accessible to just about everyone.

Whether you are investing in the stock market, a retirement plan, or life insurance, there are opportunities to grow your wealth and prepare for your financial future for every budget. That’s right: you can start investing even if you only have the $100 your grandma gave you for your birthday. 

Purchasing life insurance is one of the best and most accessible ways to prepare for your financial future. I suggest working with Ladder. They offer flexible term life insurance policies that are designed to meet your specific coverage needs while also working with your specific budget. Additionally, you can change your coverage level at any time as your financial situation changes.

If you want to invest in the stock market but are starting with a smaller contribution, look for investing brokerages or platforms that offer fractional share purchases (investments that are less than one share of stock) and don’t charge fees on “low balances,” commissions, or transactions. This will allow your dollar to stretch as far as possible as you begin your investing journey so that you can get the most bang for your buck—literally!

 

“Investing is like gambling.”

I’ll be the first to admit that investing and gambling have a few things in common: you are just as likely to hear “minimize risk to maximize reward” in a casino as you are at an investing firm, and there is no denying that many people approach gambling and investing with a similar “get rich quick” mindset. 

It’s not these similarities that have fueled this widespread misconception, though. Rather, it’s the fact that, at their core, both gambling and investing involve an element of risk and share the hope of turning a profit.

But where gambling and investing dramatically differ is in the amount of risk associated with each.

When it comes to gambling, your odds of winning money never really change. It doesn’t matter how many times you bet on red over the years—your odds are still 50% that you will win and 50% that you will lose. Sure, that means that you could strike it big and walk away from the table with a whole lot of money, but the odds are just as good that you’ll walk away empty-handed or—even worse—in the hole.

This is not the case for investing, though. While gambling always comes with risk, many investment opportunities are low-risk and offer a very high – or even guaranteed – chance of return. For example, investing in bonds is considered a very low-risk investing option, as bonds are typically less vulnerable to market volatility and are purchased with a promise from the issuer to pay back the investment with interest. 

Even the risk of investing in more volatile investments like shares can be mitigated when done strategically and for the long term. After all, the market consistently appreciates, meaning that the longer you hold onto an investment, the more likely you are to make money.

And you don’t have to just take my word for it – in Morgan Housel’s book The Psychology of Money, the former Wall Street Journal columnist reveals that if you put your money in the stock market for only one day—meaning that you buy a fund today and sell it tomorrow—the odds of making money are 50%. But if you hold onto your shares for a year, those odds increase to 68%. Hold onto them for 10 years? Your odds increase again to 88%. And if you hold onto those shares for 20 years, your odds of making money increase to 100%. 

I don’t know about you, but I would take those odds any day.

 

“You need to time the market to make any real money with investing.”

You know how I mentioned that investing is not like gambling in most cases? Well, that is unless you are trying to “time the market.”

“Timing the market” is a risky investing strategy in which people make all of their investments based on what the market is doing at the moment in hopes of maximizing their returns: they try to figure out the perfect time when the stock market will go up and preemptively pour a lot of money into certain stocks, and then sell those stocks at a premium high just before their value goes down.

I know what you’re thinking: “Tori, that sounds amazing. Shouldn’t everyone try to time the market?” 

Well, you know that old saying, “if it was easy, everyone would do it?” This also applies to timing the market. If it consistently worked and didn’t put thousands (if not more) of your own dollars on the line, then yeah, everyone would do it!

Here’s the thing: what sounds very simple in theory is much more difficult in practice. No one—and I mean no one—can know with absolute certainty what the stock market is going to do on any given day at any given time. Even the most seasoned and experienced investors cannot predict the intricacies of what the stock market will do on any given day, making it profoundly difficult to know exactly when you should buy or sell to maximize your return.

Additionally, despite our best efforts, none of us are completely immune to our emotions and “gut feelings.” While this can sometimes be a benefit to an investing strategy, investors who are trying to time the market can be particularly susceptible to making rash investing decisions that ultimately negate their very own strategy: they see a stock performing well so they impulsively invest at a premium with the hopes that it continues to increase in value, and they sell at a loss out of panic when that same stock decreases in value.

Finally, “timing the market” is also commonly referred to as “day-trading”—a practice that is so demanding on your time and mental effort that it is usually considered a full-time job. For those of us that already have a full-time job but want to use investing as a tool to generate additional income, day-trading would be far too demanding on our already busy lives to be sustainable.

This is why, once again, it is a better strategy to invest for the long term. Not only will this allow your investments to increase in value as the market likely appreciates, but it could also save you all the time, energy, and stress required to try and time the market.

 

“You should wait to start investing until [X, Y, Z].”

Whether it’s waiting until you have more discretionary income, more knowledge of the stock market, or more time to dedicate to investing, many people believe that they need to wait for the “perfect time” to start investing.

This is one of the most damaging misconceptions to hold onto, as when it comes to investing, time is your most valuable asset.

We have already discussed how the longer you hold onto a stock, the more likely you are to make money on that investment. But the sooner you start investing, the more time you have to take advantage of compounding, aka every investor’s favorite tool.

Compounding allows you to earn interest on your initial investment as well as the interest that the investment accrues. In other words, compound interest is the interest that you earn on interest – and is one of the most valuable financial resources available as it essentially allows your money to grow in value as quickly as possible.

For example, if you invest $100 into an account that offers 5% interest, after one year you will have $105. After the second year, you will have $110.25—your initial investment of $100 will have made $10 in interest, which in turn made $0.25 interest on the interest itself.

While this may not seem significant at first, years and decades of accruing interest on an ever-growing balance can result in a truly impressive sum. 

This is why you should not wait to start investing: even just giving yourself an extra five or ten years to take advantage of compound interest can be the difference between having thousands and hundreds of thousands of dollars in your savings account. 

 

“You shouldn’t invest during a recession because you’ll ‘lose it all.’”

I saved this misconception for last because it is one that I have been hearing so frequently lately.

Many of us recall the economic recession of 2008 in which countless experienced investors lost fortunes in the stock market essentially overnight. This led to an extremely common and strongly held belief that investing in the stock market just before or during a recession is a surefire way to “lose it all.”

But the reality is that the only situation in which you lose money in the stock market is if you sell your investments at a loss—meaning that you sell them for less than you bought them for. As I previously mentioned, this is especially common in short-term or risky investing.

You see, many of us didn’t know the full context of what caused all those investors to lose so much money in the stock market in 2008. These weren’t necessarily investors who were using low-risk, long-term investment strategies—rather, they were investors who were pouring massive amounts of money into high-risk investments with the hopes of making a very quick profit.

Meanwhile, many other investors did use strategic, long-term investing strategies during the 2008 recession. While the value of their portfolios may have decreased temporarily, over the next fourteen years, they experienced massive returns on those investments – quite the opposite of “losing it all.”

So if you invest strategically for the long-term—with the intention of holding onto your investments through the highs and lows of the market—statistics are on your side, as the longer, you hold onto an investment, the better your odds are of making money—even during a recession.

Additionally, a recession offers a unique opportunity to investors: think of investing during a recession as shopping at your favorite store during a big sale. As a result of the recession, the stock price of many companies will go down, meaning that you can invest at a much lower price than normal. This will allow you to earn a more significant return on your investment as you allow those investments to increase in value for years and decades to come.

So if you have ever wished that you could go back in time and invest in high-performing companies before they “got big”—this is basically your chance to turn back the clock.  

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