For some people, investing is a strange, foreign concept that can lead to confusion. Even worse, it can lead them never to invest. Everyone seems to have an opinion on investing, and it can be hard to know who to trust. But if you avoid these 9 nine investing misconceptions, you should be on the path to investing success.
1. Investing is too risky
One of the most common misconceptions is that investing is inherently risky. The truth is, it’s more of a risk not to invest. Every year, inflation steadily decreases the purchasing power of a single euro. If you keep your money in the bank or cash and choose not to invest, it’s all but guaranteed to lose value each year. (Read more about inflation here.)
While the possibility of losing money in the stock market is real, the broader market has consistently performed well over a long time. For example, since its creation nearly 100 years ago, the S&P 500 index has generated average returns of about 10% per year. Though this doesn’t mean your investment will grow each year, it does mean that if you keep your money invested in the market for several years, you’re very likely to enjoy a return on that investment.
2. You need a lot of money to invest
While most people with vast wealth are successful investors, you can start investing with just a couple of euros. Some investment funds have minimums, while others require you to be an accredited investor (in the EU, this entails working in a relevant role in the financial industry for 1+ years, consistently making sizable trades or specific financial holdings over €500,000). However, these types of investments represent a small percentage of the opportunities for investing and are almost always far riskier than the stock market.
Like DEGIRO and Interactive Brokers, many brokerages don’t have a minimum amount required to open a new account. Even if a particular stock is trading at a price much greater than the amount you want to invest, you can find brokerages that allow you to purchase fractional shares of stock. It doesn’t matter if you have €100 or €100,000–you can (and should) start investing today.
3. You can time the market
In an ideal world, you’ll be able to buy into an investment when it’s at its lowest and sell when it’s at its highest. Since we can’t predict the future, it would, of course, be impossible to perfectly time the market. While you can conduct research and have some degree of confidence around the timing of your investment, there are no guarantees about which way an investment will move.
There’s a famous saying, “it’s not about timing the market, but time in the market.” This adage emphasizes that you should prioritize keeping your money invested over a longer period rather than trying to pinpoint the exact right timing for buying and selling.
Many people make the mistake of waiting until they think they see the perfect buying opportunity to make their investment. This can be a costly mistake and easily remedied by taking the approach of euro-cost averaging. Euro-cost averaging is an investment strategy where you take the amount you want to invest and divide it into even pieces to make smaller purchases of the same investment (regardless of the share price) over a period. Using euro-cost averaging can help you reduce risk and avoid investing at the wrong time.
4. It’s too late to start investing
It can be a challenge to start investing, especially at a young age when your income is limited. For that reason, many individuals postpone investing for years or even decades. No matter how long you’ve delayed investing, it’s never too late to start. Investing early is a great way to capitalize on compounding interest, but even if you’re in your 50s or 60s, you can still reap the benefits of investing.
5. Picking individual stocks is the best way to make money
There are individuals who “beat the market” (outperform the broad catalogs) by picking individual stocks that turn out to be big winners. Unfortunately, far more individuals lose money trying to outperform the broader market. Those few who succeed are often seasoned professionals with extensive research supporting each investment decision.
There’s nothing inherently wrong with buying individual stocks, but it’s essential to understand the risks associated with banking on the share price of an individual company to rise significantly. For most investors, buying shares of indices that track a basket of more stable stocks will be the best path to investing success.
6. You have to be a financial expert to invest
It’s easy to be intimidated by financial terms like futures, options, and trading on margin. A common misconception is that you have to be a financial expert or have an advanced degree to get involved in investing. Besides the plethora of online information, there are also excellent funds that can simplify smart investing for novices and experts alike. If you’re still feeling uncertain about investing, you can always speak to a financial advisor, who can help guide you through the process and make suggestions on which funds to consider.
7. Financial advisors are only for the ultra-wealthy
Yet another widespread misconception of investing is that financial advisors only serve the ultra-wealthy. While the majority of millionaires do have financial advisors, many financial advisors are happy to work with you if you’re starting your professional career or if you only have a small amount of money you’d like to invest. Financial advisors are there to help you make smart financial decisions, including but not limited to investing. Additionally, most financial advisors make their money on commissions or as a small percentage of the assets they manage for you, so you’ll very rarely pay any upfront fees.
8. The stock market is the only way to invest
The stock market is a great way to invest, but it’s not the only one. Many investors choose real estate, cryptocurrencies, bonds, mortgage-backed securities, peer-to-peer lending, precious metals, and other alternative investments. There are pros and cons for each investment type and some, like real estate, usually require more capital than others to invest. If possible, it’s always best to diversify your portfolio by gaining exposure to a variety of different asset classes.
Choosing to diversify your assets can help limit your risk exposure during down markets. If you’re too heavily invested in one asset class, like stocks, you might be harder hit by an economic recession like the Great Recession in 2008. Millions of people learned this lesson the hard way, so take time to focus on allocating some of your investment monies to non-equity investment classes, too, like certificates of deposit (CDs) and bonds.
9. Past performance is not an indication of future results
If you’re interested in a seemingly unbeatable investment, remember that past performance is not a guarantee of future performance. Specific information can be gleaned from past performance, but you can’t rely on an investment to perform in the future the way it has historically.
For instance, the FTSE 100 Index had been coasting steadily until February 2020, after which it shed over 25% of its share price in a single month. Since then, the index has recovered to its pre-pandemic levels. This all shows that even the most wildly successful investment cannot be counted on to continue its current trend.
If you know of someone still struggling with these misconceptions, feel free to share this article with them and help them start investing today!