Lots of people talk about investing. Some are boastful types who tell tall tales. Others are fearful gold hoarders, constantly anxious about a major economic collapse. And then there are the elitists. These folks seem to know the secrets of the stock market but won't share them. If you're around any of these personalities, you've probably heard some common investing myths.
Unfortunately, internalizing those myths can cost you. What you believe about investing could push you to hold too much cash or to sell when the market gets rocky. Or it could keep you from investing at all. Any of those responses can limit your earnings and make it harder to reach your financial goals.
As an extreme example, say your neighbor has you convinced that you need specialized knowledge to be successful with stocks. So you decide to save your money in cash. You put $200 monthly into an account earning 1%. After 25 years and $60,000 worth of deposits, the balance will grow to about $68,000. But alas, a 2% inflation rate will chip away at the buying power of your savings, and your spending power will end up at about $40,000.
Alternatively, you could have put that money in a tax-advantaged retirement account. By investing in stock mutual funds or the stocks of large, mature companies, your annual return would have been closer to 7% after inflation. At that rate, your balance would grow to about $162,000 -- $122,000 more than if you'd held that money in cash.
You could run hundreds of scenarios like this to quantify the costs of either not investing or investing too timidly. But that sounds super boring, so let's get to the point. There is a financial benefit to overcoming the investing hang-ups you may have picked up from boastful neighbors, Depression-era grandparents, or slick co-workers. Look at these four common investing myths to see if they could be holding you back.
1. Stock market investing is risky
Your stocks and mutual fund shares can lose value, and fast. It's natural to find that scary. No one likes to lose money, especially when it feels so preventable. But the risk of investing can be managed.
The first and most important rule is not to invest money you need within the next five years. That way, if there is market turbulence, you won't be forced to sell your positions at a loss. Instead, you can stay invested and wait for the market to recover. That keeps you in the running to benefit from recovery gains, which can be quite dramatic.
The second rule of managing risk is to stay diversified. Or, said in laymen's terms, don't put all your eggs in one basket. Hold at least 20 individual stocks at a time or invest in mutual funds and exchange-traded funds (ETFs), which are already diversified.
And finally, if you're just starting out, invest in large, mature businesses you can understand. Walmart, Clorox, McDonald's, and Dollar General are examples. These companies have track records for managing through all kinds of economic and stock market cycles. They also have loyal customers, access to capital, and experienced leadership -- qualities that are associated with stable, steady growth over time.
2. Stock market investing is expensive
You could easily spend $10,000 or more building a diversified portfolio of stocks. But you don't have to. You can buy mutual fund and ETF shares in small dollar amounts. You could also buy fractional shares of stocks and ETFs for as little as $1 at a time.
Fractional shares are what they sound like: fractions of shares. Fidelity, Charles Schwab, Robinhood, and Stash are all brokers that allow you to buy stocks and ETFs in fractions. You might spend $5, for example, to buy 0.03 of a share of Walmart. That position mostly functions like regular shares, in that you'll earn 3% of Walmart's dividend and benefit from share price appreciation.
3. You have to know how to beat the market
You don't need to beat the market to be an investor. You'd do just fine from a wealth-building perspective with near-market returns, especially when your alternative is cash, which sets the bar pretty low.
Near-market returns are easy enough to accomplish. Simply invest in a low-cost S&P 500 fund like the Vanguard 500 ETF (NYSEMKT:VOO). The fund's portfolio mimics the S&P 500 index, which is generally considered a gauge for the market as a whole. As a VOO shareholder, you'll earn returns that are just a tick below the index's performance, with the difference being mostly related to the fund's operating expenses. Specifically, VOO's average annual return over the last 10 years is 12.97%. During the same time frame, the S&P 500 grew 13.01% annually on average.
VOO hasn't beaten the market, but who cares? A near-13% average annual return over a decade is nothing to complain about.
4. You have to monitor your portfolio constantly
Some investors enjoy tinkering with their portfolios constantly, but that doesn't have to be you. There's no shame in investing passively; it's actually the preferred approach of legendary investor Warren Buffett. To make it work, you'd select high-quality companies, or funds with high-quality portfolios, that you can hold for long periods of time.
There are benefits to buying and holding your stocks, too. You'll have more free time, for one. You'll also be better positioned to benefit from long-term market growth. Stock prices can be up or down by double digits in any one year. But over longer periods of time, growth in the range of 7% to 10% is far more likely. That dynamic works in favor of passive investors, who do less to earn more.
Take control of your wealth plan
Freeing yourself from sweeping, negative beliefs about investing empowers you to act decisively on your wealth plan. Yes, there are risks, sometimes involving large amounts of money. And the market can be incredibly complex. But you can manage the risk and learn what you need to know along the way -- even if your slick co-worker tells you otherwise.