Last Updated: 7th July 2021
17 Investment Myths You Should Stop Believing Now! And Why You Should Start Investing Today
Investing is an incredibly intimidating concept for most people.
Last Updated: 7th July 2021
Investing is an incredibly intimidating concept for most people.
Table of Contents
This fear of investing is likely due to a few key factors.
First, people are afraid of losing money. I can’t say we can blame them. Humans have a natural tendency to be hurt more by losses than to feel rewarded by gains. This means it feels worse to lose $50 than it feels good to win $50. It makes sense, though. How can you be as hurt to not gain what you never had in the first place?
This is an odd phenomenon in psychology, but it tells part of the story of why so many fear investing. Many also experienced large losses or knew someone who did during historic crashes like the one in 2008. This caused many investors to pull their money out at the bottom and swear off investing ever again.
Moreover, almost all of our financial opinions and strategies are handed down to us by our parents. People are either paralyzed by their own fears or by others who have been burnt in the past. This causes fewer people to pitch in their money for a business venture.
This has been helped a bit by social media in recent years. Brokerages like Robinhood offer free trading, which helps ease the danger of losing your own money. Moreover, many influencers are talking about it. It seems the younger generations are getting more into investing than ever before. Nevertheless, the majority focus on short-term trading or high-risk bets to attempt to get rich quickly. This is not true investing.
It is a true tragedy that there are no financial education courses taught in the public school system in North America, at least not any widely practiced ones. There is also an extreme lack of financial knowledge globally, and it seems we are doing almost nothing to remedy this.
A little financial literacy goes a long way. Once you learn the power of compound interest over time, you will likely never look back again. Yet, so many of the youth today have never been aware of these concepts. Unless you actively search for financial education in books and online sources, it will likely never be introduced to you.
We have a wide-scale lack of any practical financial knowledge globally, and there is not much being done to solve it. Luckily, if you are reading this article, you are here to learn the truth about investing so that you can push all the rumors and misinformation aside.
Investing is all about getting rich slowly. The core of investing is paying yourself first and buying assets that will compound your wealth consistently over the long run. There is so much false information and misinformed opinions out there. Maybe you are even harboring some yourself.
Let’s take a look at the many myths out there about investing and discuss the truth behind them so we can all be better investors going forward.
You hear this reasoning the most, you must admit. This is arguably the most common reason people don’t invest because they think it is too risky. The thing about investing is that there are many different methods. Each comes with its own set of risks. Then again, everything we do in life carries a certain risk. We just should not plunge in blindly.
Most people think of investing as putting tons of money in one stock and hoping it doubles or quadruples in a year before selling. This is actually gambling, and instead, you may as well just go to the casino.
On the other hand, investing is buying a broad share of the entire global economy and letting your money grow over time. This is made possible as the world gets better and better and creates more and more value. You can also buy and hold great companies you believe in over the long run, but this is slightly chancier. Notice none of these have to do with quick gains or high risk. It’s simply putting your money in a vehicle that produces more and more value over time. This is far from gambling.
The risk you take by dealing with the market’s volatility rewards you with great compound interest gains over time. Short-term market movements make the marketplace seem risky, but when you zoom out and look at it over the long term, you see it is really quite a safe bet. Sure, there will be market corrections and crashes, but you have no need to worry if you are in it for long-term wealth generation. In fact, prices dropping just create a great opportunity to buy more shares for lower prices!
Once again, this is the second on this list because it is likely the second most common argument against investing. Most people, especially those not doing so well financially, believe investing is something only the rich have the luxury of doing. This may have been true in the past, but finance and investing have been democratized and made easy for everyone, no matter their income or social status!
Now you can start investing with just $1. In fact, some apps even round up your purchases and support your spare change! This may not seem like a lot, but it really adds up over time, especially when you add compound interest into the equation.
The funny thing about this myth is that most think you have to be rich to invest, but it’s actually quite the opposite. You have to invest in becoming rich.
This is another misconception and scares plenty of people away from investing for good. The funny thing is when you invest in the public stock market, it is actually one of the most liquid investments in the world. You really don’t need to lock up your money at all. If you invested today and suddenly needed your money tomorrow, you could always sell your shares and get the money back within a few days or even the same day with some new brokerages. Investing with the long run in mind is preferable, but you will not be prevented from liquidating your assets.
What you should really worry about is inflation. If you hold your spare cash in a savings account instead of investing, you will actually be losing money over time to inflation. So it may not even be enough to cover your expenses if an emergency happens far in the future!
This is one of the most frustrating myths to hear thrown around by people who don’t want to invest. Investing is actually incredibly simple and doesn’t need to take much thought at all. You can just buy and hold low-cost index funds and regularly put money in. You could check your investments once a year if you wanted to and have no worries.
When you buy index funds, you are purchasing a share of the entire global or US economy. This means as long as businesses as a whole are making more money in the future than they are now, you will profit. You will be making more money, and your share of the economy will be worth more. That seems like a pretty safe bet, and it doesn’t take a genius to figure that out.
There are tons of quick and simple guides out there today on how to open an account and buy low-cost ETFs. That is all you need to do, and you will be a great investor getting great returns over the long run.
What’s funny about this myth is that, once again, the exact opposite is true. Instead of watching your assets every day and worrying about them, the best thing you can do is buy-in and refrain from monitoring.
The less you look at your investments, the better you will feel. Constantly checking induces anxiety, which you don’t need right now. It adds all of our human emotions and biases into the mix when you should just be letting your money and the economic machine do the work. When anxiety gets the better of you, you may even make some terrible decisions.
The best performing, long-term investors are the ones who purchase consistently on a regular schedule and never look at their account outside of this. If you remove your emotions from investing, you will remove all the risk of user error. Just buy and hold for the long run.
This is similar to the point above. Thinking you can time the market is a fool’s game. Nobody can predict the future, so why would you bother trying?
The best way to invest is to take all the emotions out and act rationally. The way many investors do this is by a simple method called dollar-cost averaging.
This is where you invest a set amount every month no matter what the market is doing. This way, you buy on the highs, buy on the lows, and everything in between. You never miss a great buying opportunity because you waited too long thinking a crash was coming.
A great quote from Warren Buffet is, “The market can stay irrational way longer than you can stay solvent.” All he is saying here is trying to wait out or outsmart the market is a fool’s game. Therefore, consistently buy-in and ignore the rest of the noise.
This myth is the other side of the coin. Compare this to the people who think investing is too risky and not worth it. These people are especially prevalent on social media today and are the ones who believe you can make hundreds or even thousands a day just buying and selling on the stock market. Many people will try to convince you of a new stock that will amplify your assets 100x in the next year or how you can use this trading strategy to make 1% a day and be rich in a year. This is all sadly false.
Think about it. If someone knew this was true, why would this so-called insider be telling everyone? If someone could trade and make 1% a day regularly, they could start a business and make billions in a few years. They certainly wouldn’t need to be trying to get more likes on social media.
It’s super easy to get hit with the fear of missing out and buy into some of these common myths. So, don’t get down on yourself. It happens to all of us. The key is to catch yourself and start your journey to building real wealth. Saving and investing consistently with a long-term mindset and well-diversified plan is the only foolproof way to get rich. However, it doesn’t happen overnight, and anyone who says it does is either incredibly lucky or lying.
This myth is not as bad as most of the other ones we have covered so far. If you have a financial plan, stick to it. Know that you are doing great and are already ahead of 90% of the population.
The only problem with this mindset is it makes you static and unwilling to change. It is unlikely one plan will work for the rest of your working career without fail. While sticking to the plan will mitigate the risks, you need to keep it updated, as well. In short, do not be too complacent.
This myth is the one that is by far the most untrue. It is especially damaging because the greatest advantage you can have in investing is starting young! Time is your greatest ally when taking advantage of compound interest. Because due to its exponential growth, your investments grow much more in the later years than the earlier ones.
Let’s look at an example:
Person 1 started investing at the age of 20 and invested $10 000 per year until age 60.
Person 2 started investing at 30 and invested $10 000 per year until they were 60.
Assuming an annual return of 7%, here are the end results…
Person 1: $2,136,000
Person 2: $1,010,000
The difference those extra 10 years of investing made was over a million dollars by the time they reach retirement!
If you start early, you also don’t have to invest nearly as much to reach millions as you would if you start later. The point here is starting young gives you the greatest advantage of all. So, do not put it off.
This myth is very common for people new to investing to fall into. They choose the best-performing stocks and put all their money in those stocks. While it seems like a fair strategy on the surface, history has proven this to be incredibly flawed. There is a reason every brokerage and fund company says multiple times past performance does not guarantee future returns.
The future is always uncertain. The current winners may keep winning, but it is also just as likely that they will start losing as well. There is no way to know. That’s why the key is to be well-diversified and not care about the current winners or losers.
Studies have shown that the best-performing mutual funds nearly always underperform in the periods right after outperforming. This is called the reversion to the mean. There is a mean return that the market makes. Some companies and funds may outperform one year. However, over the long run, they always average out. This means after a run of outperformance, it is likely they will underperform over the next period as the returns begin to average out over time.
Don’t let the fear of missing out get the best of you, diversify and buy the lowest-cost funds that track the whole market. You may not excel, but at least you can be sure you won’t underperform by trying to chase past returns.
While a 401(k) is an incredible tool to save for retirement, it is definitely not the only one available to you. The 401k is best to be used to save long term for retirement and is especially powerful when combined with employer matching.
You do have other options though, a Roth IRA allows you to invest $6000 a year, and the money grows completely tax-free. You can also take the money out of this account whenever you want, unlike a 401k locked until retirement.
The other option is just investing in a taxable account. This is where you should invest all the money you can that is above the contribution room for your 401k and Roth IRA. You will have to pay taxes on your gains if you sell your positions, though so as usual, it’s best to buy and hold for the long term.
While investing in individual stocks can be highly recommended and provide some great long-term gains, it takes on more risk than necessary. Most people want to buy hype stocks and make huge gains within a year. This is not the attitude of an intelligent investor.
The best way to invest is by buying low-cost but broadly diversified index funds. These are just funds that track the whole market instead of being actively managed. You can buy funds to track the entire US stock market or even the entire global stock market. When you buy these funds, you are just betting that the world as a whole will be more economically successful in 10 years than it is right now. Guess what? That is a great bet.
Instead of trying to pick the winners, just buy them all! This way, you never miss out on a great gain in the stock market just because you made a bad pick. All you make by picking individual stocks is a bet that you can predict the future better than everyone else. Instead, make a rational decision and just buy the whole market. Compound growth in the world economy will get you extremely wealthy over time. There is no need to try to speed this process up through guesswork.
This is a common myth most new investors believe. The truth is that the price of an actual stock doesn’t really matter at all! What really matters is the value of the entire company as a whole. This is called the market cap. It is the value of all the outstanding shares of the company combined, multiplied by the value of each share.
The market cap tells us how valuable the entire company is. The price of the stock just depends on how many stocks are out there in the market. Companies with very low-priced stocks usually just have more shares out there than those with expensive stocks.
What you really want to be looking at is the market cap. It is easier for a low market cap company to double since a company worth 1 billion can go to 2 billion much easier than a 500 billion dollar company can go to 1 trillion.
However, thinking about how easy it is for a stock to double is the wrong way to think about investing in the first place. You should be choosing investments based on their ability to compound your wealth consistently for many years in the future, not based on how quickly they can double.
While famous blue chips are much safer bets than most risky low-cap stocks you hear being pumped on social media, it doesn’t mean they are always a safe bet. The word always is never true in investing. Nothing is ever a safe bet, and nothing will always be a good investment. You need to always keep up to date and make the best long-term decisions to grow your wealth.
The best example of why blue-chip stocks are not always a safe option is that these safe bet blue chips constantly change. The blue chips from 20 or 40 years ago have changed drastically, and most have fallen heavily out of favor. For example, you may have taken GE to be the go-to safe growth stock, and now it has plummeted down to many investors’ dismay. Many companies were touted as safe blue-chip stocks during the dot com bubble, only to fall 80 to 90% in a few months.
No stock is always a safe bet. It is best to be widely diversified, so you own everything and get rid of your company-specific risk. While blue chips may be safer than risky stocks, that is not necessarily an accurate assessment. You should also always be wary of people talking about investments as “safe bets.”
This is the myth that the financial media wants to sell you on the most. There is a reason the financial industry makes so much money each year, and it’s because they take it out of everyday people’s pockets. 95% or more active fund managers underperform over the long run. This is because beating the market is a zero-sum game. For one fund manager to outperform another must underperform.
Added on top of this terrible historical track record, money managers charge ridiculous fees to their clients. A 1% annual fee is considered low for a money manager. Many take 2% plus a share of the profits, and yet that 1% can have catastrophic effects on your wealth in the long run.
Let’s look at an example:
Investing $10 000 a year for 40 years with 0.1% fees with a low-cost index
Investing $10 000 a year for 40 years with 1% fees with an actively managed mutual fund.
Investing $10 000 a year for 40 years with 2% fees with a high-cost mutual fund.
We will assume a 7% yearly return before fees.
Low cost index end value:$2,079,863
1% fee end value:$1,640,476
2% fee end value:$1,268,397
So as you can see, over the long term, paying someone to manage your money takes a massive chunk out of your wealth. A 1% fee would cost you over $400 000 over 40 years, and a 2% fee would cost you over $800 000 over 40 years. This is not at all worth it. A manager will perhaps perform as well or even worse than your investment-educated self.
Do the smart thing, manage your own money and keep all of your gains for yourself.
This once again is an example of not understanding the fundamentals of investing and thus being scared away. If you take ridiculous risks and try to get rich, you do put yourself at risk of losing all your money. However, if you make a solid financial plan for yourself, buy well-diversified funds and hold for the long term, your chance to go to $0 is basically impossible.
Think about it, if you hold shares of the entire global economy, you will lose all your money all the companies in the world need to go bankrupt. If that happens, we would have a much bigger problem than how much money we have, notably how to eat and survive.
As long as you have a plan and are widely diversified, the chance of going to 0 is impossible unless there is a global apocalypse, in which case, I wouldn’t be worried about your investments.
I would like to end with something some people claim is a myth, but is really a fundamental truth of investing.
This article basically highlights reducing risk through long-term holding and accounts diversification.
This is because you are simply betting the world will create more value economically in the future than it does today.
Why take a risk on a certain company when you can own the whole economy? If you buy low-cost ETFs that track broad market indexes, like VTI or VT, you can make sure you get your fair share of the incredible economic growth the world has seen over the past decades and will likely continue into the future.
There may be periods of down years, but the best way to weather these storms is to stick to your plan, keep buying consistently and hold your diversified portfolio. This way, you can’t get half of your net worth wiped out by a bad stock pick. It also eliminates all room for user error and allows you to act completely rationally by sticking to your plan consistently year after year.
The only edge you can get in the stock market is being at your most rational. You must buy and hold diversified index funds. These consistent strategies will help you surpass 95% of everyone you know in the long run.
Now that we have explained and debunked the most common investing myths, I hope you are confident enough to get out there and start investing for yourself!
It can definitely be intimidating, especially with the flood of information out there. Don’t get drowned by the mix of Hyped Helens and Debbie Downers. Just remember, the best thing you can do is ignore all the noise and stick to your own plan for the long term.
Read a few books on the topic and thoughtfully strategize with your own unique situation in mind. Investing is all about compounding your wealth over the long term, so don’t go for quick solutions that will let you down in a few months.
Take all your emotions out of the equation and follow your plan, only making changes if you have decided your long-term plan needs to change. Don’t let the rest of the world fool you and get in your head. The best weapon you can carry is the knowledge that everyone can be a great investor and create great wealth over time. All it takes is a little initiative and a whole lot of patience.
Accessing the stock market as an ordinary person has become drastically easier over the past few years. With a plethora of apps rushing to market to provide the best investing experience for everyday investors, it has never been a better time to start investing.