Exposing Five Common Myths Holding People Back From Investing
People believe that in order to invest, you need to be rich. They think it is too risky to invest. They think they are already investing because they have a home. These common myths prevent people from building a basic portfolio . And, if you ever plan to retire, you will need this portfolio. Don’t let these myths get in your way.
Myth: It takes a lot of money to invest.
You need money to make money investing, it’s true. But you don’t need a lot of money.
Mutual funds are a safe option for your portfolio. A mutual investment fund is a collection of various investments. Index Funds are a type of mutual fund created to reflect a specific index, such as the S&P 500. Exchange Traded Funds (ETFs) are similar investments. (The main difference is how they trade; you can read more here ). Some of these funds require a minimum of $ 3,000 or even $ 10,000 to invest. But there are tons of things that, as we pointed out , only require $ 100 or $ 200.
Our very own Melanie Pinola told you:
Charles Schwab’s index funds only require $ 100, or for about $ 200 you can get a bond ETF (Schwab US Aggregate Bond ETF, SCHZ) and an index ETF that covers US and international stocks (Vanguard Total World Stock ETF, VT). In addition, some funds forgo a minimum investment of $ 1000 or $ 3000 (or others) if you set up an automatic investment for as little as $ 50 per month.
If you want to start investing but don’t have tens of thousands of dollars, you should definitely read our post on how to start with very little money . For more information on how to start investing in general, read our post on How to Create a Newbie Portfolio . Either way, don’t let this myth get in your way.
It’s worth mentioning that there are companies on the market that trade at less than $ 10 a share. We don’t recommend doing this, but you can even start investing even less than a dollar with small stocks. So no, you don’t need a ton of money to start investing. But it is also unwise to invest in a separate company or asset. Your investment “portfolio” (whatever you invest in) should be diverse. This means that you want to invest in different companies, bonds and other assets. For this reason, we do not recommend anything other than the traditional buy and hold strategy that uses the aforementioned tools, but the point is that you do not need a fortune to get started in the market.
Myth: investing is too risky.
Many people shy away from investing because they mistakenly think it is like gambling. Of course, investing in one asset is very risky (although your odds are probably better than gambling). But investing in a broad market over the years offers a pretty good chance. As financial expert Lori Itkin told us :
Let’s say you spend $ 5 a week on lottery tickets for 20 years. That’s $ 260 a year, or $ 5,200 in 20 years. Will you win the lottery? Perhaps, but your chances of winning are extremely low . The US stock market brings on average about 8% per annum. Over the past three years, things have been much better, but there have been several years when things have been much worse, for example, in 2008. But the longer the time horizon, the more likely you are to find out the 8% average annual return. …
Plus, gambling works differently than investing. In gambling, the goal is for other people to lose money. The winner only makes money if the others lose. When investing, the goal is to use the money to grow; nobody has to lose to make money.
However, there is some risk in investing. And some investments are more risky than others. Technically yes, the market could drop and all of your assets could drop in value entirely. But as long as you don’t sell when it drops, history has proven that you will bounce back and are more likely to get that average return if you invest correctly. The market is always cyclical, filled with ups and downs, and, as we said, peaks are not equal to impending doom . In any case, the alternative is no better. In fact, things are getting worse.
Given inflation, not actually investing may be more risky. Most savings accounts carry interest below the inflation rate , which means that if you think that simply stuffing money under your mattress is the best option, you are kind of losing money over time.
Myth: the market can be beaten.
Investing is not as unpredictable as gambling. It is also not so predictable that you can time the market and beat it with huge profits.
With a boring set-and-forget (or buy-and-hold) investment portfolio, you pick several funds and let them do their job without worrying about time-to-market. Over time, you should get the average market return. Many brokers and financial companies say they can surpass these profits and make more money, but research shows that this is not true.
Vanguard has published one such study . They compared a buy-and-hold investment strategy to a performance-seeking strategy. Comparing returns from 2004 to 2013, they found the following:
Investors are naturally attracted to highly efficient, actively managed funds. The result, for many, is an efficiency-seeking method in which current funds are sold out of the portfolio to make room for recent winners. Vanguard’s research shows that this behavior is flawed, as the buy-and-hold strategy has surpassed the pursuit of results in all nine blocks of Morningstar’s capital style over the past decade.
You can see how much the results varied:
Again, Vanguard is a large mutual fund, so you might be skeptical about their results. A separate peer-reviewed study published in the Journal of Finance examined 2,076 mutual funds and their performance over 32 years. The study reported that the number of fund managers who surpassed the benchmarks of these funds was “statistically indistinguishable from zero.”
Add to that the fact that actively managed funds often come with higher fees, and that seems particularly silly. While investing is not as unpredictable as gambling, it is also not predictable enough for you to know the timing. As the old saying goes, it’s your time in the market, not your time to market.
Myth: gold is a classic and smart investment.
When people are worried about the economy, they tend to look for alternative investments . Gold and precious metals are usually traded as “safe” investments.
Bankrate further explains:
Any hint of bad news reveals gold bugs. You can hardly listen to the news or talk on radio stations without hearing advertisements for investing in gold. “A lot of them are being sold on people’s fears and are selling their greed by exaggerating, not necessarily telling the whole story,” says Michael Masiello, president of Masiello Retirement Solutions, a financial planning firm based in Rochester, NY.
There is really nothing wrong with investing in gold or other alternatives. But you should be aware that their returns are only supported by inflation, so you don’t really get a lot of income.
But one non-Doomsday gold investing argument is that it protects against inflation. Financial expert JD Roth is weighing this topic in a post for his website Get Rich Slowly. He points out that gold enthusiasts argue that as prices rise, gold tends to retain its value. Roth objects:
It’s true, but in the long run, that’s all he does. There are other things that tend to retain their value during inflation, if that’s what you want. Real estate, for example. And TIPS (Inflation-Protected Treasury Securities, a type of bond). And maybe even savings accounts .
If you want to fight inflation, there are better options. In his book Stocks in the Long Term, Jeremy Siegel analyzed the numbers to find the historical performance of several total investments. Results? Since 1926:
- The real return on gold (which means “return after inflation”) is around 1%.
- According to my calculations (not Siegel’s), real estate also has a real return of about 1%.
- Bonds returned about 5%, or about 2.4% after inflation.
- Stocks bring in an average of about 10% per year, and the real return is about 6.8%.
This is not to say that gold is a terrible investment. But a full-fledged portfolio is not invested in any asset. And if gold is your only asset, your portfolio will make little money. In the Atlantic, financial advisor David Marotta recommends holding less than 3% of your portfolio in gold .
Myth: My home is an investment.
People often think of themselves as investors because they own a home. This has been widely debunked in recent years (especially after the 2008 housing bubble), but many people still cling to the idea. People tend to assume that assets are valued at home, but this is not always the case.
Yale economist and Nobel laureate Robert Schiller actually calculated and debated the topic. He notes that overall, the housing market is barely outstripping inflation. The Washington Post analyzed his data and assigned a number to it. They reported that over the past 100 years, home prices have only risen 0.3% per annum, adjusted for inflation.
Like gold, your only real estate asset can help protect you from inflation, but again, true investing is a well-balanced portfolio of stocks and bonds .
It’s not the most exciting option, but again, a solid investment portfolio is n’t impressive. It’s boring, balanced, and stable. But it is widely believed that investing is a dynamic roller coaster ride filled with mind-boggling ups and downs and daring active risks.
In fact, all that is needed is to select several funds and let them grow over time. Getting rid of the myth of fact, investing is actually quite easy.