The biggest myths about investing in the stock market
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Between business news sites, personal finance blogs, podcasts, fintech apps, and social media, we’re constantly inundated with information and opinions that shape how we think about our money and, most importantly, how. we use it.
One piece of advice we come across often is to put our money on the market, but the reality is that such a decision can be intimidating. We know that investing can help us build wealth in the long run, but there is a risk. Not to mention the fact that it’s hard to decipher what’s real and what isn’t in the markets from everything we hear and read.
To help you out, Select spoke to two investment gurus about the common market misconceptions they hear, so we can dispel the myths and make sure your money is working for you.
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Myth 1: investing in the stock market is like gambling
On the surface, it’s easy to see how people would relate investing in the marketplace to gambling. The equity trend even showed how quickly investors can accumulate (and lose) insane wealth overnight. Erin Lowry, author of âBroke Millennial Talks Moneyâ and âBroke Millennial Takes On Investing,â even acknowledged that investing just for fun can be more like gambling.
There are some similarities between the two, admits Jeff Tsai, co-founder of JAVLIN Invest, a new app that helps investors assess the volatility of the stocks they hold in their portfolios.
âBoth involve risking capital without knowing for sure whether you’ll get a return,â Tsai explains. “But perhaps the biggest difference between investing and playing is that in the long run time is in favor of the investor whereas with gambling time is in favor of the casino.”
Patrick McGinnis, CFA, CFP and partner at wealth management firm Moneta Group, agrees that investing is a long-term game where the investor most likely benefits from its sustainability.
âIn the game, one person wins and another person loses,â McGinnis says. âInvesting is making a profit, and that profit is distributed to shareholders, making it a long-term way to get rich versus short-term speculation. “
And with investing, it’s not a bad idea to have someone walk you through the process. A financial advisor can help you find long-term investments for your portfolios so you can avoid the excessive risk of jumping on the most popular stock of the day.
Myth 2: You can time the market
Despite what many seasoned investors or TikTok stock traders may try to tell you that no one really knows what the market is going to do.
âCalculating the market is incredibly difficult because it’s really a matter of two decisions – when to exit and when to buy back,â McGinnis said.
Take the early days of Covid, he said, when investors looked to pull out of the market amid financial chaos, saying they would return when things got better. “[But] selling low and buying high is no way to make money in the market. “
Instead of trying to time the market, the best way to be successful in investing for the long term is to stay the course. Avoid getting lost in the daily news cycle and let your initial investment strategy unfold.
Myth 3: The more stocks you own, the more diversified your portfolio will be
âThis is true to some extent, but the key is that stocks are not correlated with each other,â Tsai said. In other words, how differently do stocks react to certain market conditions?
Correlated stocks tend to move up and down together, while uncorrelated stocks tend to move in opposite directions. A portfolio of all high-growth tech stocks, for example, wouldn’t be very diversified because they would likely all move in tandem, Tsai explains. This can help your profit potential in the case of tech-friendly business environments, but it also increases your risk since all of your eggs are in one basket.
The key to having a diversified portfolio – what any financial planner will recommend – is to spread your money across multiple asset classes (stocks, bonds, real estate, etc.) so that you have more opportunities to make money in almost any environment .
Myth 4: Percent Gains and Percent Losses Are Equal
Understanding percentage gains and losses over time is important for investors because it helps them determine their rate of return, or their net gain or loss over a period of time. The challenge is to think that they are equivalent when you do the math.
Tsai gives an example: let’s say you were down 10% yesterday, but you are up 10% today. You might think you’re back to where you were two days ago, but that’s not correct. If you started with $ 100 two days ago, lose 20% (or $ 20) yesterday, then earn 20% today, you only have $ 96: losing 20% ââof $ 100 means it gets you. $ 80 remains, but a 20% gain on $ 80 is $ 16, which takes you to $ 96.
In fact, you would have needed a 25% gain to get back to $ 100: 25% of $ 80 is $ 20. What does Tsai want investors to be wary of? âOur minds can easily deceive us,â he said.
Whereas investing money in the stock market was once reserved for those who had a large enough sum to invest and the means to hire an expert to guide them, this is no longer the case.
Today, thanks to the emergence of Commission-free online brokers and robo-advisers, anyone can trade with just a small amount of money (or invest knowledge, really). Robo-advisers are basically software that use algorithms and data to invest on your behalf, based on your investment goals, time horizon, and risk tolerance.
The highest rated Betterment robo-advisor has no minimums that investors must meet, and the annual account fee is 0.25% of your fund balance. So, if you invested $ 5,000 with Betterment, you would only pay $ 12.50 each year.
Female investors, in particular, may want to consider the Ellevest robo-advisor. Its platform algorithm takes into account the important realities of women’s lives, such as pay gaps, career breaks and longer life expectancies, so that women can get a real feel for their financial situation. Ellevest offers three different membership levels, ranging from $ 12 to $ 97 per year.
At the end of the line
While everything we read or hear about personal finance is certainly not true, there is one cohesive message we can all agree on: investing our money can help us build real wealth.
Now, the next time you come across any of the above five myths about the stock market, you will know how valid these statements really are, and be able to adjust your plans accordingly.
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Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.