Beginners guide to investing part 2:Twelve investing myths

MYTH ONE: I NEED A LOT OF MONEY TO GET STARTED IN SHARES

We can invest in the top 50 companies in NZ or the top 500 US companies with as little as $500, followed by monthly contributions of $50. Shaersies even advertise a minimum of just $1 to get started.

Investing is not just for the rich. Everyone has to start somewhere and the sooner we can start, the sooner we can grow our pot. Investing just $200 a month for 30 years at a 6% real return will see us with about $200,000.

 

MYTH TWO: IT TAKES TOO MUCH TIME

Not necessarily. The old school days of spending hours researching companies and all their reports are not required. If we are an individual stock picker, then sure this may still be needed. Individual stock picking can be timely, costly and risky though

The emergence of low cost index and mutual funds have eliminated the need for all the research. There are a lot to choose from to suit our investment profile. They are managed by a third party so keep an eye out for costs. The lowest cost funds are those that track the entire market. Very little management is needed by the third party.  Studies have shown time and time again that over the long term, low cost funds that track the entire index outperform the majority of individual investors that claim they can beat the market. Less risk, less effort and higher return sounds like a win-win -win scenario.

 

MYTH THREE: INVESTING IS TOO RISKY

The opposite is actually true. NOT investing is too risky. If inflation was 3% and we were leaving our money in a bank deposit returning 2.9%, we will actually be losing money.

Investing is only as risky as we decide. We do not need to take to huge risks to get good reward. If we want to only pick one or two stocks and need the money in less than 5 years then yes, this is very risky. However, investing in multiple stocks over a time period of 15 years or more is actually pretty low risk. Especially if our portfolio is well balanced and diversified with other asset classes.

 

MYTH FOUR: INVESTING IS TOO DIFFICULT TO UNDERSTAND

As discussed in the first article of the series, investing is not that scary once we get used to the terminology. In addition to this free blog, there is plenty of other educational materials available. Library books, internet blogs and articles, and podcasts. All free. Many investment advisers try to use words you don’t understand. It is their way of letting you know they are smarter than you. This is a deliberate strategy for you to get to use them.

Investing doesn’t need to be complicated. My strategy of making a monthly payment to my chosen indexes regardless of ups and downs in the market couldn’t be easier.

 

MYTH FIVE: I COULD LOSE ALL MY MONEY

Sure, if we were invested in just one or two stocks and the companies went under. But this is not smart investing in the first place That would be gambling. As long as we are well diversified, it is not gambling. By spreading our investments, we guarantee we will not lose all our money.

We may see a 40, 50 or even 60% 1-year decline in stocks in our lifetime, but as long as we are investing for the long run we should make our money back, and then some. Stock markets ALWAYS rebound after a fall. In fact, with a long-term strategy, the best time to buy stocks is when they are declining. They are on sale. Think of it as buying shoes half price. Stock buying is no different.

 

MYTH SIX: MORE RISK MEANS MORE RETURN

Not always. We still need to be smart about our investment decisions. Gambling on a single international stock is not smart. Investing in an international index would be a better idea and is not gambling. Considering the potential loss of an investment is not enough. We also need to consider the likelihood of the loss. Only then can we have a better idea of the risk vs return.

“There are two times in a man’s life when he should not speculate. When he can’t afford it and when he can

— Mark Twain

MYTH SEVEN: YOU CAN BEAT THE MARKET

Short term -yes, long term – no. Many people love a gamble – it’s exciting.  Investors who try to beat the market fail to do so consistently. Indexes outperform active trading more often than not.

A simple and boring buy and hold strategy tends to outperform actively managed funds that try to beat the market. Actively managed funds also come with higher fees. The law of averages suggests the top performers for the last 5 years will not be the top performers for the next 5 years. Chasing the current winners or hot stocks is not generally the best strategy.

 

MYTH EIGHT: YOUR OWN HOME IS AN INVESTMENT

Despite popular belief, returns received from our primary residence generally only just outpace inflation. This is due to the costs of owning a home which are often forgotten but must be considered. Mortgage interest, rates, maintenance, insurance and so on.  Of course there will be short term periods where there are massive booms in prices where we may do very well. Much better than the sharemarket. But this is very difficult to time and over the long run, the returns are much lower. The main reason to purchase a primary home is shelter, not returns. The main reason to purchase an investment IS returns.

 

MYTH NINE: FEES DON’T MATTER

1% extra in fees doesn't sound like much. When we have a timeline of 30 years it is significant. If Tim invests $400 per month for 30 years (8% returns before fees) with a 2% management fee, and Jane another investment charging 0.6%, Jane would have $130,000 more than Tim. The returns were the same, the only difference was the fees they were paying.

 

MYTH TEN: YOU NEED TO BE DEBT FREE BEFORE INVESTING

Sure, if you have high interest credit card debt I would always recommend paying that off first. But not all debt is created equal. If we have low interest student loan debt, there is no reason why we shouldn’t invest. Some people may hate debt and want to pay it off and that is fine. The decision is a personal one. But from a financial perspective, it often makes more sense to start investing as early as we can, even if we still have low interest debt.This way we allow compound interest more time to work its magic.

 

MYTH ELEVEN: I’LL START INVESTING LATER WHEN I HAVE MORE MONEY

Time in the market matters. The power of compound interest cannot be underestimated. On top of this, we may not have more money later. Often our 20’s and 30’s is the best time for saving as our discretionary income is so good. We may be single with no kids. We are able to live in cramped accommodation with other people sharing the costs. We are climbing the corporate ladder. We have time to research. As we get older, free time reduces and expenses tend to climb with childcare costs, mortgages and general living costs. We are not as willing to share our living space with others like when we were younger. We have less discretionary income than when we were younger. At an older age we are now financially responsible for more than just ourselves.

It may not be until our 50’s that we can seriously get into investing. My suggestion is to make it a habit as early as you can and stop putting it off. Even if it is small amounts and sounds insignificant. Then later in life our money will be able to work for us, instead of us working for it.

 

Myth twelve: Index investing is only average

Index investors are better than average. Over any significant length of time, the average returns of all investors are frequently lower than that of the market indexes. This is because many investors try to time the market and get it wrong. They buy too high and sell too low. They chase the hot stocks and miss out on good valued stocks. Poor habits and emotions get in the way. Active investors also pay more in fees. Active investors spend so much more time on investing than passive index investors. When index investing is said to be average that is false. Probably spin from investment advisers. Because the reality is the majority of index investors returns are higher than average market returns over the long term.

 

FINAL THOUGHTS

The first two articles in this investing series have looked to dispel some common myths and barriers that prevent many of us from even getting started in investing. The next article will focus on the different types of asset classes we can invest in and how to get started.

 

 

The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here

 

Do you have any other myths that you may have encountered? What is preventing you from investing?