Investing is one of the best ways to grow your savings, but its reputation for being complicated and risky keeps many people away. Some new investors do lose quite a bit of money, but if you steer clear of common investing myths, like the five I outline below, you can hopefully avoid becoming one of them.
1. You need a lot of money to start investing
Some people won't even consider investing because they think they don't have enough money to get started. That might be valid if you need all of your monthly income to cover your living expenses or if you're using your extra cash to pay down debt or build an emergency fund. But if you have an emergency fund already and you have a few extra dollars to spare, you have enough to start investing.
Some robo-advisors enable you to get started with as little as $5, and most online brokers don't have a required minimum initial deposit. It's true that you probably won't see amazing returns if you're only investing a few dollars, but starting with a small amount of money actually isn't a bad idea if you're new to investing, as it gives you a chance to get your feet wet without risking too much.
2. Past performance guarantees future returns
When you're researching a stock, bond, mutual fund, or another investment product, you'll probably come across charts tracking its value over time. Some people believe that if a stock has done well in the past, that means it's sure to do well in the future. Sometimes that's true, but if investing were as easy as picking the assets with the best recent performance, we'd all be millionaires.
You should consider past performance when choosing where to invest your money, but it should only be part of the picture. If a company has seen recent growth or losses, try to understand why. Think about where the company is going and how that might impact its future performance. When considering past performance, avoid just looking at the last few months or years; look at the past decade or more if you can. This gives you a better sense of the company's long-term stability.
3. Investment fees are insignificant
Investment fees might not seem like a lot, but they can add up, especially if you're buying and selling often, as this eats into your profits. Your broker will have its own fee schedule, and sometimes your assets may have fees, too. Mutual funds, for example, charge an expense ratio (a percentage of your assets paid annually) to all shareholders to cover the costs of the work the fund managers do. A 1% expense ratio might not seem like much, but that means you're losing $1 for every $100 you have invested in that mutual fund.
You should focus as much on keeping your costs low as you do on choosing the right investments. Choose your broker carefully and look over its fee schedule so you know what to expect. Compare it with others in the industry. You should do the same for your investments. The prospectus should list any fees associated with the asset. Try to avoid paying more than 1% of your assets in fees every year if you can.
4. You can beat the market by timing your investments right
This statement is technically true, but the trouble is, unless you can predict the future, there's no way to know when is the best time to buy or sell. Often, trying to time the market loses money for people instead of increasing their wealth. It's not a gamble you want to take, especially if you're talking about your life's savings.
If you're new to investing, you're better off practicing a strategy called dollar-cost averaging. You invest a certain amount of money in the same way on a regular schedule. Sometimes you'll buy when prices are high and sometimes when they are low, but in the end, it evens out and you'll pay a reasonable price overall.
5. You need to know a lot about investing to do it right
Perhaps the most pervasive myth is that you must know a lot about investing to make money at it. But the opposite is actually true. You don't have to know anything about investing at all to make money at it. The rise of robo-advisors has enabled people to invest on their own without having ever done so before. All you need to do is answer a few questions and let the robo-advisor do the rest.
But that doesn't mean you shouldn't try to educate yourself. Learning more about investing will enable you to choose your own investments more confidently and build a custom portfolio that could earn you even larger returns.
Investing can be complicated, but it doesn't have to be. Even if you don't have a lot of money or experience with investing, that doesn't mean you can't benefit from it. And if you do choose to invest on your own, be cautious at first until you're more familiar with what you're doing.