In our last post, we spoke about how making small everyday decisions can snowball into huge money saving results over time. Today, we’re talking about the dreaded ‘I’ word. That’s right, investing. AHH. Terrifying, right? Well, not as much as you might think.
In this post we are dispelling the most common myths about investing and explaining how you can avoid making beginner mistakes when starting your investment journey. Let’s dive straight in.
- Myth 1: Investing is too risky. I had a friend who bought shares in Chocolate Teapot Plc and he told me he lost all his money! Won’t that happen to me!?
- Myth 2: Investing is complicated and time-consuming. I don’t even know where my nearest stock exchange is!
- Myth 3: Investing is only for the wealthy. I don’t have millions lying around in the bank!
- Myth 4: I need to be an expert in investing. I don’t have time to look over quarterly earnings figures or shareholder meeting minutes!
- Myth 5: I have to lock my money away to invest. What if I want to buy a new set of golf clubs?
- Myth 6: It is safer to keep my money in an interest savings account. I’ve used the same bank for years and never have any problems.
- Myth 7: I have to analyse the markets every morning, noon and night. When will I have time to watch my favourite TV show!?
- Myth 8: I have to time the market. How will I know the right time to buy or sell?
- Myth 9: Investing online isn’t safe. How do I know my hard earned cash won’t be stolen by cybercriminal gangs?
Myth 1: Investing is too risky. I had a friend who bought shares in Chocolate Teapot Plc and he told me he lost all his money! Won’t that happen to me!?
It is true that you can lose money when investing (especially if you invest in chocolate teapots). In the short term, the market is volatile and trying to get rich overnight is a high risk strategy. The shorter your investment horizon, the more at risk you are of experiencing losses.
On the other hand, market returns over the long run usually far exceed the returns you can expect from an interest savings account. The longer you hold your investment, the higher the chances that you will ride out any short term fluctuations in price. This greatly increases the probability of you making gains in the future.
Another important part of risk management is ensuring your investments are diversified. The idea is to hold different asset classes that perform well in contrasting environments. This way, the gains from one class can offset the losses of another.
Diversification makes you less susceptible to the volatility of one type of investment and reduces the chance of major swings in the value of your investments. Multi-asset funds, such as index funds, are a type of asset that people commonly use to diversify their portfolio hassle-free.
Myth debunked: You can reduce the riskiness of your investments by having a long term investment horizon and holding a diversified portfolio of assets.
Myth 2: Investing is complicated and time-consuming. I don’t even know where my nearest stock exchange is!
Woah, slow down there Warren Buffet. Investing nowadays isn’t like what they show you in the movies. You don’t have to be on the trading floor pumped full of testosterone and shouting down the phone to buy stock in a company.
Trading platforms have moved online, which means all you need nowadays is a mobile phone and an internet connection. It’s all handled automatically, online, and in many cases, instantaneously.
In most scenarios, all you need to invest is to sign up to an online platform and choose which shares or funds you would like to buy. This can all be done from the comfort of your own home. So you can cancel your taxi to Wall Street and stick the kettle on instead.
Myth debunked: Investing nowadays is simple. The only requirements are a mobile device and an internet connection.
Myth 3: Investing is only for the wealthy. I don’t have millions lying around in the bank!
Nowadays, investing is for everyone. It is actually the method that many people follow to become rich in the first place.
Gone are the days when you had to pay a broker a hefty execution fee to finalise trades and handle the associated paperwork. In today’s world, the vast majority of investing is processed online. Because brokerages no longer require physical offices or flashy front desk attendees, the cost of trading for the everyday investor has decreased substantially.
The reduction in the cost of investing has led to a proliferation in the number of online trading platforms. These platforms charge you small fees at either a flat rate or per trade, often for less than the price of a cup of coffee. The cost is so low that almost everyone can access the markets.
Myth debunked: Thanks to the internet, investing nowadays is cheap and affordable for everyone. You don’t need millions in the bank to become an investor.
Myth 4: I need to be an expert in investing. I don’t have time to look over quarterly earnings figures or shareholder meeting minutes!
If you want to invest in individual companies, you should definitely keep an eye on the markets and any key announcements from the businesses you own shares in. However, there is much more to investing nowadays than picking individual stocks and shares.
Most financial platforms over a whole host of investment products, including index funds, retirement funds or bond funds. Funds contain a basket of different investments, which are chosen by a financial expert on your behalf.
If you invest in a fund, all you have to do is choose the right fund for your risk profile and investing timeline. All funds come with a helpful brochure which explains what the fund is trying to do in an easy to read format. You can then leave all the difficult parts to the fund manager whilst you enjoy a cup of tea at home.
Myth debunked: You don’t need to be an expert to invest. Nowadays, you can simply choose a fund which is managed by a professional financial advisor on your behalf.
Myth 5: I have to lock my money away to invest. What if I want to buy a new set of golf clubs?
You can do both, Tiger Woods. Unlike a fixed term savings account, most trading platforms do not require you to lock your investments away for a set period of time. In most cases, your investments can be sold either instantaneously or within a few days at no extra charge if you need to access your cash on a quick turnaround.
Having said this, it is recommended that you hold on to your investments for at least five years to minimise risk and ride out short term volatility. Generally, this improves the chances that the value of your investments will increase over time. However, there is nothing to stop you from withdrawing your money earlier if you need to or if you feel the time is right.
Myth debunked: You don’t need to lock away your money to invest. Most investments can be sold either instantly or within a few days, giving you easy access to your money.
Myth 6: It is safer to keep my money in an interest savings account. I’ve used the same bank for years and never have any problems.
While keeping your money in a bank account is generally considered safer than investing, you need to understand that it isn’t entirely risk free.
Inflation will constantly eat away at the value of your money, decreasing its purchasing power. Currently, inflation is at its highest level in over 30 years, which means the value of your savings is being eroded at a much faster rate than usual.
There is also the risk that your bank goes insolvent. While this may sound extreme, this exact scenario happened in 2008 and many people were unable to withdraw their savings. New financial regulations and consumer protections have reduced the chances of this happening, but it is important to know that the risk still persists.
Myth debunked: Using a savings account is generally considered safer than investing, but it does still have risks. With inflation levels soaring, it may be a better time than ever to ditch the bank and invest your money instead.
Myth 7: I have to analyse the markets every morning, noon and night. When will I have time to watch my favourite TV show!?
Even if you’re choosing your own individual companies to invest in, you don’t have to look at the markets every day. It should be sufficient for you to simply set up news alerts on your phone or tablet for major press announcements or price swings.
On the other hand, if you want a completely hands off approach, you could just choose to invest in a multi-asset fund, like an index fund or retirement fund. You can then simply forget about it.
Your fund manager will reallocate or diversify the investments in the fund in accordance with market conditions and the rules of the fund. Unless you want to, you don’t have to lift a finger or monitor the markets at all.
Myth debunked: Being a good investor doesn’t mean looking at the markets every day. Instead, many investors opt for a multi-asset fund and let their fund manager do the hard work for them.
Myth 8: I have to time the market. How will I know the right time to buy or sell?
There is a common misconception that you need to predict market performance to become an investor. In truth, trying to guess how well a stock will perform is like trying to predict the lottery numbers. There are simply too many variables which can affect the outcome.
As we’ve explained, the most important factor in reducing investment risk is to hold your investment for a long period of time. The sooner you hold the investment and the longer you hold it for, the higher the chances that you will ride out any short term volatility.
Trying to ‘buy a dip’ or ‘sell at the peak’ is a fool’s errand, and most people who time it right simply get lucky. As the old adage goes, time in the market is better than timing the market.
Myth debunked: Timing the market is usually a recipe for disaster. Statistically, you are much better off buying and holding your investment for as long as possible, to smooth out any short term fluctuations in price.
Myth 9: Investing online isn’t safe. How do I know my hard earned cash won’t be stolen by cybercriminal gangs?
Wherever you choose to store your money, you take on an inherent amount of risk. As we’ve explained, even holding your money in a bank is not entirely risk free.
Nowadays however, automated computer software and cryptographic security ensure that managing your investments online is a safe and secure way to access the financial markets. It is also the reason why investing is now accessible to the everyday investor.
Still, you should only use reputable platform providers who are well-established and have been around for a long time. Many online platforms use two factor authentication to ensure that your money is kept secure and will notify you of any unauthorised attempts to access it.
To increase security, remain alert and be suspicious of anyone who asks for your login details or password. Be aware of the information you make publicly available on social media and make sure you don’t reveal any sensitive personal details.
Remember the golden rule: if someone makes you an offer that sounds too good to be true, it probably is.
Myth debunked: Reputable online trading platforms use the latest technology to ensure your money is safe. However, you must still remain vigilant to online scams and anything that sounds too good to be true.
Many people hear horror stories about investing and think that it is something to be scared of. However, equipped with the right attitude and knowledge, even a beginner can use investing as a powerful tool to turbocharge their income.
In my next post, we’ll focus on using index funds to generate passive income and how you can make your money work for you. See you in the next one.