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Everyone’s familiar with the TV show called Mythbusters. It’s a show where they use science to test out different rumors and myths.
Well today, I’m bringing Mythbusters to investing. That’s right, we’re going to debunk some of the top stock market investing myths.
When it comes to investing, many people don’t understand it correctly which prevents them from investing. Especially these days, the internet makes it so easy for wrong information to run rampant.
I’m going to break down and show you why some of the top investing myths are simply not true. You might find something you thought was true but is actually a myth.
Investing Myth #1 – Investing is risky
I’m sure you’ve heard someone tell you this at least once.
Many people think investing is risky, but it is not. It only becomes risky when you take on too much risk without knowing what you’re doing.
An example of taking on too much risk would be like putting your life savings into a GameStop bet. That’s what I call gambling. If you want to gamble, you’d be better off going to Las Vegas, because stock market investing shouldn’t be treated like gambling.
When it comes to investing, you don’t want to put “all of your eggs in one basket.” If that basket falls, you would lose all of your eggs because they would all crack, and that’s risky.
The same analogy can be applied to stocks. If you were to put all of your money in a single stock, and if that stock goes bankrupt, you will lose all of your money.
Diversifying your money across multiple different stocks would eliminate most of the risk. We can easily do this with index funds. An index fund is like a basket full of different stocks. By buying the “basket,” you’re investing in all of the stocks within the basket.
Risk vs. Reward
One thing you must keep in mind when it comes to investing is the risk vs. reward ratio. Many people say the stock market is risky because they don’t understand this concept.
In the financial world, no matter what type of investment you have, the risk vs. reward ratio always goes hand in hand.
The risk vs. reward is a simple concept that goes like this:
- If an investment can achieve higher returns, it comes with higher risk.
- If an investment is less risky, it will achieve lower returns.
There is no way around this. If you want to achieve higher returns, you’re going to have to take on more risk. On the other hand, if you want to avoid risk, you must settle for lower returns.
Therefore, a good investing strategy properly balances how much you’re willing to risk vs. how much returns you want.
I go into much more detail in my article that explains how you can decrease risk while investing.
Investing is not risky, you just need to learn a bit to make a proper plan.
Investing Myth #2 – You need a lot of money to start investing
Another investing myth that many people mistake as true, is that you must have a lot of money to be successful at investing.
This may have been true in the past, but today, it simply isn’t true. As technological innovation makes its way, there are now many methods that the average person can invest his/her money to grow their capital.
Index Funds
Index funds are a cheap and easy way for any average person to start investing.
Vanguard Index Funds are one of the most popular ones. However, most funds from Vanguard have a minimum initial investment requirement of $3,000 to $4,000, which can be a hefty cost to most people.
But did you know that Fidelity and Schwab offer the same investments with a $0 initial investment requirement? This means that anyone can start investing in their index funds for as little as $1.
Another way you can start investing with little money is through brokerages that offer fractional share trading. Buying a fractional share means you buy less than one share.
This can be useful when the cost of one share of a stock is too high for you to afford. For example, Apple stock is currently trading for $132 per share. If you don’t have enough money to purchase one whole share, you could buy a fraction of a share for as little as $1.
Not all brokerages offer fractional share trading. A few that do are Fidelity, M1 Finance, Robinhood, and Interactive Brokers.
Investing as little as $1 may not seem like a lot of money, but it adds up in the long run.
Create a savings plan, spend less than you earn, and invest the difference. No matter how little the money may seem, it’ll all add up in the future.
Investing Myth #3 – Popular companies make for good stocks
Just because a company is popular, doesn’t mean it makes for a good stock. Popularity does not guarantee that a company will continue to grow and be successful in the future.
Let’s take a look at some examples.
General Motors
General Motors is a car company that was established in 1908. Founded by William C. Durant, Charles Stewart Mott, and Frederic L. Smith, they grew the company to the largest car manufacturer in the United States.
The company enjoyed a 60% market share in the United States and also was the world’s largest automobile manufacturer for 77 years. It was one of the largest stocks in the S&P 500.
Unfortunately, the financial crisis of 2008 hit the sector pretty hard and forced the company to file for bankruptcy. The U.S. government decided to buy the company to save it.
Netflix
Netflix was one of the biggest things to ever exist.
They innovated the way we watch TV. Instead of renting DVDs at the store, they came up with a way to stream shows online.
Netflix’s innovation became popular, and its stock gained a crazy 455% within four years.
But then the COVID-19 pandemic hit. It was something that no one could’ve anticipated and affected the economy on a global scale. After the pandemic, inflation reached a 40-year high at 8%.
As the cost of living rose, people realized that maybe they can live without their Netflix subscription. After all, Netflix has been raising prices on their services.
Many people canceled their subscriptions and revenue fell. The stock dropped more than 70% in less than six months, wiping out four years’ worth of gains.
All of this doesn’t mean you shouldn’t buy stock of popular companies. It just means that a stock isn’t an automatic buy just because it’s popular.
Make sure you’re doing your research and have a plan.
Investing Myth #4 – Investment fees are not important
The next investing myth we’re going to talk about is investment fees – the greatest enemy of your portfolio.
Many people think they don’t matter and think it’s okay to ignore fees as long as their portfolio is doing well.
That couldn’t be further from the truth. Fees and commissions eat into your portfolio and can significantly diminish returns. That’s why it’s important to stick with funds or brokerages that charge little to no fees and commissions.
Let’s take a look at a few examples.
The average *expense ratio for an actively managed mutual fund is 2% and around 0.03% for index funds that are passively managed.
The reason why actively managed mutual funds are more expensive is because they actively try to beat the market by constantly buying and selling stocks. Index funds are passively managed only to track the market, instead of trying to beat it.
*An “expense ratio” is a fee that mutual funds charge you to invest in it. It’s usually expressed as a certain percentage, and it’s the amount of your portfolio you have to pay every year.
At first glance, a 2% expense ratio and a 0.03% expense ratio look negligible. But let’s do the math.
Let’s say we invest $10,000 in two funds, one with a 2% expense ratio and the other with a 0.03% expense ratio. We contribute an additional $500 every month for the next 30 years.
At the end of 30 years, the 2% fund would’ve given us $682,560.80 and we would’ve paid $341,567.29 in fees.
The 0.03% fund would’ve given us $1,017,818.97 and we would’ve only paid $6,309.12 in fees!
That’s a huge difference. Fees do matter and you need to make sure you’re paying as little in fees as possible. Don’t pay the fund manager and keep your money in your portfolio.
Investing Myth #5 – You need to be an expert to invest
Many people are intimidated by the number of investment options that are available and the difficult terminology that gets thrown around.
This leads them to believe that they must be an expert to be successful at stock market investing.
This again is another investing myth.
With a little bit of studying, anyone can become successful at investing. It doesn’t take a four-year degree to be successful.
Stock Picking
Many think they need to learn all about fundamental analysis to be able to pick stocks that’ll perform well in the long term.
But did you know that more than 80% of stock market experts that tried to pick stocks failed? We’re not talking about just anyone here, we’re talking about financial experts that have dedicated their whole lives trying to beat the stock market.
I don’t know about you, but if they can’t beat the stock market, I would second-guess my ability to do so.
The easiest way you can get started and be successful in investing is by investing in index funds. Not only are they cheap, but as I mentioned earlier, index funds beat the majority of actively managed mutual funds.
Investing in index funds does not require you to be a financial expert. All you need to do is open a brokerage account, choose a fund, and buy-in. I go into much more detail in this article.
Investing Myth #6 – You need to monitor your investments daily
Whoever said they need to track their investments daily is probably not investing, but trading stocks. Investing and trading are two very different things.
Trading stocks involves buying and selling multiple different stocks on a daily, weekly, or monthly basis and is highly dependent on market fluctuations.
On the other hand, investing means you keep buying the same stocks no matter what the market does. That’s why thinking that you need to track your investments daily is an investing myth.
When you invest in a company, you choose to invest in it because you like the fundamentals of the company. No matter what the market does, as long as the company remains the same, you continue to buy shares in the company.
There is no need to monitor your investments daily.
As a matter of fact, you might want to avoid frequently checking your investments. If you’re an emotional type of person, you might panic when you see the value of your investments fluctuate. This might cause you to sell all your shares in a panic, which is something you never want to do.
With that said, make sure you never panic and stick with your plan. If you think you’re going to panic, don’t check your investments more often than you need to.
Investing in the stock market is a long-term game, and monitoring your investments daily is just not necessary.
Investing Myth #7 – You need to know when the right time to buy is
Many people think they need to know the perfect timing to buy into a stock.
However, timing the market is something that rarely works because no one can consistently predict what the market is going to do. If someone claims they can, they’re lying.
Let’s say for example you want to get the best price, so you try and time the market. You think that the market will go down, then go back up at a certain price point, so you wait for it to start going down.
But the market doesn’t go down and keeps going up. You continue to wait for the market to go down to your price point, but it never does. If this happens, you will miss out on all those gains you would’ve achieved if you would’ve simply bought in.
Schwab conducted a study to see if market timing worked. The results? They found that even bad market timing achieved superior returns. Overall, it’s whether you invested or not that mattered, and not market timing.
Investing Myth #8 – It’s safer to keep your money in a savings account
I know some people that are afraid to invest and think that keeping their money in a savings account is safer. They’re afraid of losing money and think the stock market is risky.
But did you know that keeping your money in a savings account is also risky? It’s risky because of inflation.
The annual rate of inflation is 3.8%. In other words, you lose 3.8% of your purchasing power every year.
The average savings account APY is around 0.24%.
See how the APY from the savings account can’t even keep up with inflation? It’s like you have a small leak in your bank account, and every year, money leaks out little by little.
Just because the value of your money in a savings account doesn’t fluctuate doesn’t make it risk-free. Your money in the stock market will fluctuate heavily, but in the long term, the stock market will yield superior returns.
By investing in the stock market, you can achieve an annual percentage return of around 9%. Yes, there will be years when you’re down 30-40%. But overall, you will yield around 9% which clearly outpaces inflation.
Conclusion
Today, we “myth busted” some of the top investing myths out there.
There is definitely a lot misunderstanding of the stock market, and I hope I was able to provide some value.
Want to learn about the pros and cons of the stock market?