Whether you’re a new investor, or have years of experience under your belt, you’ve likely come across several “myths” about investing that held you back at the time. When it comes to investing, hindsight is truly 20/20. “I should’ve, if only I would’ve, or I could be rich!”, are all statements that can be made when peering back at how investments and the market, in general, have performed over time. If there’s something we can learn from hindsight, it’s that we shouldn’t let blanket statements, which are oftentimes myths, hold us back. This article will explore 4 common myths about investing to help avoid the “woulda, coulda, shoulda!”
Finding the Next Big Thing
Before the age of the internet, before smartphones and personal computers, there was a time when information was not as easily accessible. The slower speed, and lack of mediums to access information in regards to public companies and therefore investments created inefficiency in markets. This inefficiency could be capitalized on by stockbrokers who helped their clients find high-performing investments.
Today, everyone has access to public information almost instantaneously. The markets are very efficient, and stock prices reflect most if not all public information. Stockbrokers are no longer necessary to access investment opportunities for individuals. To top it off, academic research has revealed that participating in the market, rather than trying to “beat” the respective benchmark, is a better indicator of long-term success for investors.
The bottom line being, if mutual fund managers attempting to beat the market can’t do so on a consistent basis, why should individual investors attempt to do so? You don’t need to find the next best thing in order to be a successful long-term investor. What it does require is discipline, patience, and a well-defined asset allocation.
Sure, looking back we all wish we had invested our life savings in Amazon, Apple, or Microsoft prior to their meteoric rises, but realistically nobody for certain knew what they’d become. Today, it’s just as hard, if not harder to find the next truly disruptive companies. Don’t let fear of missing out on the next big thing keep you from investing or investing too aggressively. If a compounded growth rate between 7-9% over long periods of time will be enough to accomplish all your goals, then why risk more than you have to?
Fear of the Next Recession
A natural part of being an investor is experiencing downturns in the markets. It’s not always smooth sailing with high single-digit returns year after year. In fact, it’s common for markets to experience downturns of 10% or more at least once per year and downturns of 20% or more roughly every 3.5 years. The caveat being we never truly know when these will occur! If we did, investors would consistently sell at highs and buy at market lows. Moving in and out of the market as we forecasted the inevitable rises and falls.
Our inability to do so lends its hand to the biases and emotions we face as investors. We’re oftentimes conflicted with recency bias, or “this investment has done so well this past year, it must keep going up!” or if one of our investments does well, we must be experts and it was our expertise that resulted in positive investment performance. Understanding and confronting these biases and emotions can help mitigate their negative effects on portfolios. In addition to understanding that markets aren’t always a straight ride to the top! In coordination with natural business cycles, markets experience growth and declines.
What we do know is that over time our markets have always grown. People and companies innovate, building better or new products and services. We can’t let fear of the next recession or market decline keep us from participating in growth and helping us realize our long-term goals!
Lack of Knowledge and Control
Lack of knowledge and control around investing oftentimes lead to inaction. Waiting to invest because you want to know everything and anything about investing is a mistake. Even the most experienced investors will never stop learning. The key is to get started and to continue learning along the way. Or if you have little interest in investing on your own, hire a financial planner to develop an asset allocation that suits your unique goals and needs.
Secondly, tying into our previously debunked myth, we can’t control what happens in the markets and likewise our investments. If we have a broadly diversified equity portfolio of ETF’s, what occurs on a day to day basis is out of our control. What we can control is our asset allocation and therefore long-term trajectory of the portfolio. We can also control our recurring contributions to our investments and how much we’re setting aside to reach out long-term goals. We control how we react to bull and bear markets or positive and negative headlines.
On the contrary, investors have many resources to turn to for knowledge or guidance and do have a lot under their control. Don’t let the feeling of a lack of knowledge or control hold you back from being a successful long-term investor.
You Have to Be Rich to Invest
Whether you have $1,000 or $1,000,000 to invest, it’s never too early or late to get started. You can get started with as little as $1,000 and continue to add to your portfolio as your cash flow allows. When starting with smaller amounts it’s important to use diversified vehicles such as ETF’s or index funds. They’re low cost and provide broad diversification that couldn’t be achieved otherwise with smaller amounts of money. For example, with $1,000 you couldn’t build an individual stock portfolio that was diversified, therefore you’d use a basket of stocks in the form of an ETF or index fund to do it for you.
The earlier you start investing, even if it’s with smaller amounts, the more you can benefit from compounding returns over time. In fact, it’s fair to say you’ll become “rich” over time the earlier you start investing. Rich can mean different things depending on your outlook. Maybe rich means you’re no longer worried about your finances, you have peace of mind knowing you’re able to live your life on your terms. Or maybe rich means it’s the number zero’s on the end of your bank account. Whatever it means to you, let’s be clear, you don’t have to be “rich” to be an investor!
The Bottom Line
Investing doesn’t have to be overly complicated. These 4 investing myths have perpetuated themselves through the years, but they shouldn’t stand in your way of being a successful investor. If you need assistance with your asset allocation and building a portfolio that aligns with your long-term goals, schedule a free consultation today!
Levi Sanchez is a CERTIFIED FINANCIAL PLANNER™, BEHAVIORAL FINANCIAL ADVISOR™ and Founder of Millennial Wealth, a fee-only financial planning firm for young professionals and tech industry employees. Levi’s been quoted in the New York Times, Business Insider, Forbes, and is a frequent contributor to Investopedia. He is an avid sports fan, personal finance and investing geek, and enjoys a great TV show or movie. His mission is to help educate his generation about better money habits and provide financial planning services to those who want to start planning for their future today!