Does the thought of investing in the stock market give you a case of the heebie-jeebies? You’re certainly not alone. In fact, 61% of adults find investing in the stock market to be scary or intimidating, according to a recent survey by Bankrate.
And especially when you’re a newbie or an investing chicken of sorts, you may have gotten wind of misconceptions that may add to the confusion. To help you get your head around how investing works, and to allay your fears, we’ve reached out to financial experts on what these myths are and turn them on their head.
Here are a handful of the most common myths about investing, debunked:
Myth: Fees correlate with returns. The more you pay your financial professional, the higher your odds of success.
Truth: Quite the contrary. The truth is that usually the lower the fees, the much higher are your odds of success, explains Dejan Ilijevski, an Investment Manager and President of Sabela Capital Markets. “High fees only guarantee that more wealth will trickle up from your account to the pockets of your broker or advisor,” says Ilijevski. “Fees and costs squander returns.”
Myth: As you near retirement, you should become increasingly conservative with your investments.
Truth: While this may be the case for some individuals who will be drawing on their investments early in retirement, it’s certainly not true for everyone, explains Leah Hadley, President and Senior Financial Advisor of Great Lakes Investment Management. “Many individuals are living 30 plus years in retirement,” says Hadley. “That’s a long time to plan for.”
Hadley encourages clients to consider the bucket strategy instead. As part of your investment strategy, determine how much money you’ll need in the short-term (fewer than two years), midterm (2 – 10 years) and long-term (more than 10 years). “For funds that are invested long-term, I encourage clients to continue to be as growth-focused as they feel comfortable,” says Hadley.
Myth: Somehow the return on an investment is tied to the type of account. For example, you will get a certain return on a Roth IRA.
Truth: An account is merely a vessel in which an investment is carried, explains Jason Spencer, CFP®, Enrolled Agent (EA), and founder of the fee-only firm Financial Planning Fort Collins. “While it’s also true that tax-favored accounts will generally come out ahead once you factor in the tax implications of investing, it doesn’t change or impact the raw rate of return each investment in the account will earn on a period-to-period basis,” explains Spencer.
Myth: You have to beat the markets to succeed. Speculation works.
Truth: Speculative strategies like stock-picking and market-timing have long been proven as myths, explains Ilijevski. “To beat the markets, you need to know tomorrow’s news,” he says. “And no one has a crystal ball. Even if trying to beat the markets provides the opportunity for outperformance, net of all fees, it’s still a losing strategy.”
Myth: You should wait to invest because the market has to be at its peak. It’s best to wait until after the market corrects or experiences a downturn before you contribute cash to your brokerage accounts.
Truth: If you do this, you’re trying to time the market – and that sets you up for failure, says Eric Roberge, CFP® of Beyond Your Hammock. “The truth is that to succeed as an investor, especially if you’re in your 30s and 40s and have long time horizons, you need to prioritize time in the market.
“No one knows what the market is going to do tomorrow,” says Roberge. “We know that markets move up and down, but we never know with certainty when they’ll go up or down, or how dramatically they’ll move up and down when they do.”
That’s why you need to invest strategically, and for many people, dollar-cost averaging provides a good framework for consistently investing over time. The other key? “Stay in the market, and don’t try to jump in and out based on current events – or worse, what the financial media says,” says Roberge.
Myth: I should start investing when I earn a good income.
Truth: Time is the greatest asset in investing, explains Ian Bloom, a financial life planner at Open World Financial Life Planning. “It’s actually highly recommended that you start the process of saving and investing early in life,” says Bloom. “Time will do the ‘magic’ of compounding returns and building your wealth slowly. And on the behavioral side, living with 80 or 90% of your income only sucks if you’re used to 100%.”
Myth: What they say on the news actually corresponds to how my portfolio is doing.
Truth: The news usually quotes two or three specific indexes when they are talking about market performance, says Bloom. He explains: A good portfolio is made up of all different types of investments. For instance, a diversified portfolio might have stock investments – usually within mutual funds or ETFs – within four or five major categories, “It might have bonds, commodities, and real estate on the other side,” says Bloom. “Most of that isn’t tracked by the S&P 500 or the Dow.”
Myth: It’s likely that I could lose all my money in the stock market.
Truth: “This particular myth comes down to folks’ emotional reactions to the returns they receive,” says Bloom. “As it turns out, if you’re investing money for your future self and you don’t need it right now, a drop in the market does not mean you lost any money,” says Bloom.
Remember: You still have the investments. It’s just the value of your investments decreased – for the time being. “The only time you officially recognize a loss is if you sell when the market’s down,” says Bloom. “Building a portfolio to account for things like how long you will be invested, as well as getting a firm understanding of your investments, usually goes a long way.”
Myth: The stock market is just a casino.
Truth: For those who see stock prices going up or down rapidly and think investing in stocks is no different from gambling, I’d assert they’re doing it wrong.
“Now, if you’re day trading and trying to figure out what’s hot from one week to the next, then yeah, they’re basically sitting in a casino,” says financial planner Sean C. Gillespie of Redeployment Wealth Strategies. “But the most important difference between investing and gambling is a plan.”
Investing in stocks, when done properly, is an inherently long-term activity. “By that I mean at least a 10-year horizon, and preferably 20. Add sufficient diversification – buy at least the entire S&P 500, if not the entire market – and now you’re sitting at a different kind of roulette wheel, where 30 or 31 squares out of 38 are black and there are no numbers. If you understand how to play that wheel, you’re on your way to better understanding how to invest.”
Myth: Investing is only worth it for rich people.
Truth: Investing is how you become wealthy, explains Bloom. “You don’t become wealthy from having a good income,” he adds. “You become wealthy from things you do with your income to generate a long-term benefit for you – that’s investing.”
Myth: Complication equals sophistication.
Truth: Too many people think their advisor is giving them good advice if they present them with complicated investments, explains Lauren Zangardi Haynes, CIMA®, CFP® of Spark Financial Advisors.
But one should be very wary of complex financial products. “Frequently, complex products are simply a way for big banks and brokerage houses to hide fees and commissions,” says Haynes. “We all want to believe that we are smart enough to select the ‘best’ investment, which will provide us with the ‘best’ return – or at least better than our neighbors. This is really an exercise in ego, and it’s dangerous to your wealth.”
Hopefully demystifying these myths about investing will help you make heads or tails of what, to most, is a confusing muck of jargon and concepts. In turn, you’ll feel better informed and more confident about investing.
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