Everyone has an opinion on why you should or shouldn’t invest in the stock market, not to mention how to do it. But not everything you hear is true, especially when it comes to clickbait-y headlines or doomsday predictions from distant relatives on social media.
Find out the most common myths of investing, what you really need to know about the market, and the best tools out there to help you invest with confidence.
What’s Ahead:
1. Investing is too risky to be worth it
There is a risk to investing in the stock market, making some people afraid of losing all their money. While there is a chance of losing your invested funds, there are many ways to hedge those risks and improve your odds of earning a greater return over time. The biggest way to protect your investments is to create a diversified portfolio.
The level of risk within your portfolio should reflect your time horizon, which is the amount of time until you plan on using the money. As you get closer to needing the money, you may decide to sell riskier stocks and replace them with more stable investments.
And while you’ll see economic ups and downs over the year that will impact the value of your investment accounts, the market historically tends to perform in a positive trajectory. The S&P 500 growth averaged nearly 12% each year over the last 10 years and surpassed 8% each year for the last 30 years. While there were certainly periods of uncertainty throughout those years, the overall pattern was one of growth.
2. Cash is a safer option than investing in the stock market
Even seeing those historical averages, you may still wonder if you’d be better off simply keeping your cash in a standard, FDIC-insured account. First, it’s important to understand that those federally insured accounts max out at $250,000 per financial institution. You’ll need to spread out your money over multiple banks or credit unions once you exceed that threshold.
Another major concern with keeping most of your cash in savings is inflation. It’s smart to keep your short-term savings in one of these accounts so that you’re not worried about daily volatility in the stock market. If you’re saving for a vacation or have money tucked away for an emergency, that should definitely stay in a risk-free savings account.
But in the long term, the value of your savings will be quickly depleted in the face of inflation. This means the increase in the cost of goods significantly outpaces the savings rate. Without investing your long-term savings into the stock market, the value of your assets would likely decrease each year, making it harder to afford things in retirement.
3. You need a lot of money in order to invest
Another concern of new or would-be investors is that they don’t have enough money to start investing. Today, that’s simply not true of anyone who’s interested in investing. Years ago, you may have had to meet a large minimum investment requirement in order to work with a financial advisor who would make trades on your behalf.
But today, there are many ways you can start investing with just a few dollars. Whether you want to manage your own trades or use a robo-advisor to guide your investment decisions, there are plenty of apps and online platforms that offer low-cost options and extremely low account minimums.
A great one to use if you’re worried about not having enough money to invest is Acorns. There’s no minimum investment amount and there are several ways to grow your deposits that feel completely pain-free.
4. You have to follow stock market news daily
You may be worried about having to become a stock market expert in order to manage your investment account. But it’s entirely possible to get help so that you’re informed about what’s happening in your portfolio without putting in a lot of effort. As I said above, one of the best options is to invest with a robo-advisor. Robo-advisors use algorithms to automatically manage your portfolio based on your individual investment goals. As changes in the market occur, the platform automatically rebalances your portfolio to keep your asset classes diversified correctly.
If you want to have some control over your investments but need some help, try the Public investing app. You can choose and trade your own stock using a couple of unique features to educate yourself. You can also craft your own social feed of other Public users who share their investment strategies.
5. Financial advisors are too expensive
Investing gets a bad rap as being an expensive practice that only the wealthy can afford. I’ve already myth-busted that you need tons of money to get started, and the reality is that there are plenty of affordable ways to invest. Advisors usually charge a percentage of the assets that they manage, usually around 1%. So if you have $10,000 in your investment account, your advisor would take $100 per year.
A robo-advisor, on the other hand, averages around 0.25% of assets under management. With that same investment account, you’d only pay $25 to use the service. And if you prefer to take the DIY investor path, there are plenty of free and low-cost mobile trading apps to choose from.
6. You’re automatically invested when you open an account
This myth can slow down a newbie investor so don’t fall for it! Even if you open an account and deposit funds in your chosen investment platform, you still have to actively choose your investments. Since stock prices fluctuate and are rarely whole numbers, you may have a bit of uninvested cash left in your account.
For example, say you opened your investment account with $1,000 and wanted to purchase ETF shares that cost $380.57 each. You could only buy two full shares, totaling $761.14. You could either keep the remaining $238.86 in cash until you deposit more money, or use the money to invest in less expensive stocks. The exception is if your trading platform allows you to buy fractional shares. This lets you buy part of a stock so that you can still enjoy the growth of high-priced companies (think Amazon or Apple).
Either way, it’s important to monitor your account, including how much cash you’re holding. You want to stick with your investment strategy but also make sure you really are maximizing those funds by actively investing where it makes sense.
7. All investment fees are the same
Don’t assume that all investments cost the same. There are many ways in which your fees and costs can vary. The first place to look is at your account itself. Whether you opt to use a financial advisor, a robo-advisor, or even if you have an employer-sponsored plan like a 401(k), there is bound to be some type of administrative fee charged. Take a look at the costs versus the benefits you receive and make sure you’re not overpaying. Otherwise, your investment returns could dwindle over time.
Also, take a look at the type of investments you make and the fees involved. If you invest in exchange-traded funds (ETFs) or mutual funds, you’ll be charged an expense ratio to cover the cost of managing the fund. These expenses are different for each fund, so compare the costs to your return to understand your true bottom line.
The same holds true for individual stocks. You’ll likely pay a trading fee each time you sell your stock. If you over-trade, you could end up unintentionally losing money.
8. Timing the market is the only way to make money
The stock market fluctuates based on investor confidence, economic data, political uncertainty, and more. It’s extremely difficult to time the market and frankly, it’s not necessary to do. Remember those 10-year and 30-year average returns from earlier: they ranged from 8% to 12%. You don’t need to pick a day when the market drops to start investing; the goal is to invest with long-term returns in mind.
By investing regularly, you’ll even out the daily fluctuations of the market. This is called dollar-cost averaging. Say you devote a certain percentage of your paycheck to investing every other Friday. Some days you may purchase stocks at a higher price, while other days they might cost a little less. You don’t need to worry about saving up a large amount to invest at once and hope you pick a good day for it. Instead, a consistent investment strategy evens out the short-term fluctuations.
9. You should sell your investments when the stock market dips
Whenever there’s a significant downturn in the market, you may be tempted to sell your stocks at a loss and wait until the market recovers. However, this typically doesn’t work out to be the best strategy since downturns are usually followed by upturns. If you sell your stocks, you’ll miss out on the growth experienced during the eventual rebound.
Since 1926, the average bull market (a period of stock market growth) has lasted over nine years, while the average bear market (a period of decline in stock values) has lasted less than 18 months. This shows that downturns tend to be short-term and typically should be waited out rather than completely jumping ship on your investments.
10. The more funds you have, the better diversified your portfolio will be
Diversifying your portfolio is an important strategy to lower your risk in case one company or sector faces a downturn. Many investors use funds (such as mutual funds or ETFs) as an easy way to execute this strategy. However, it’s not always smart to overload your portfolio full of multiple funds.
One reason is that one fund can have hundreds or even thousands of companies it invests in. While you might not be able to research each company individually, you should at least know about the fund’s largest holdings. Having too many funds can make it difficult to track what you’re actually investing in.
On top of that, you may end up overlapping investments, which can have the opposite effect of diversifying your portfolio. Always review the focus of each fund and what stocks are included so that you don’t overload on the same companies or industries.
11. It’s too late to start investing for retirement
This is perhaps one of the biggest myths around investing and one of the most dangerous. No matter how old you are, you have a lot to gain by beginning to invest now. A lot of investment experts talk about how important it is to get started as early as possible. But don’t feel like you’ve missed the boat just because you didn’t start investing in your early 20s. You can still set yourself up for a better future by investing now.
MU30’s investment calculator helps you get an idea of how much your investments could grow in a variety of scenarios. You can experiment with different retirement ages, as well as conservative and aggressive annual growth rates. You’ll quickly see that even if you’re in your 30s, 40s, or even your 50s, you have time to grow your investments.
Summary
Successfully investing in the stock market definitely takes some upfront research and ongoing maintenance. But it’s not something that’s exclusive only to the super-wealthy. Take one step towards investing today and you’ll likely be that much closer to a better financial future.
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