Investing is as much a mental game as it is a financial one. It's very easy for people to make unforced errors that cost them money or cause them to miss opportunities, often because they believe something that simply isn't true. If you want to maximize your success as an investor, you'll want to recognize when you're up against one of those myths so that you can work around it.
The four stock market myths we'll discuss here are some of the most persistent ones that affect those who want to invest. Let's abandon them and work toward making 2021 a more profitable year.
1. You need a lot of money to invest
Back when trading was dominated by people physically yelling orders at each other on the floor of the stock exchange, investing was expensive. You needed to come to the table with a serious chunk of change to both cover your commission and have a prayer of getting a reasonable fill price on your orders. That tended to restrict who had access to buy individual stocks and kept us mere mortals limited only to mutual funds that had their own sets of costs and charges attached.
Fortunately, those days are behind us. Thanks in large part to electronic access to the market, several brokers have ditched their commissions entirely. In addition, thanks to fractional share trading, it's often possible to become an investor in a company even if you can't scrape up enough cash to buy a single share of it. Plus, thanks to low-cost index funds, investors looking to get the benefits of instant diversification and market-like performance now have a way to do that cheaply and with little effort.
Those innovations have made investing available at a substantially lower cost of entry, making it a tool you can use to build wealth instead of just manage wealth you already have.
2. You need a professional to help you invest
These days, it takes little more than a few clicks of your mouse to buy or sell an investment. In addition, if you have a 401(k) or similar plan available to you at work, investing via that plan alone might be enough to make you a millionaire over time.
A 401(k) plan can be the ultimate "set it and forget it" investment vehicle where you set up your contribution and allocation once, and just let it run largely unattended. As long as you have a sensible plan and review and adjust your strategy periodically as your goals and circumstances change, you don't need to pay a professional to manage that account.
That said, if you're not comfortable running your entire financial life on your own, there are Certified Financial Planner professionals that charge by the hour or by the service offered. If you pay just for the advice and guidance you need, it will probably cost you far less over time than paying for the long-term services of a professional money manager.
3. Wall Street pros are better stock pickers than you can ever hope to be
Most professionally managed funds tend to underperform relevant benchmark indexes over time. With index fund investing widely available, that makes it trivially easy for most ordinary investors to beat most seasoned professionals in most years.
On top of that, Wall Street professionals tend to manage a lot of money that belongs to other people. Those factors often limit how and where they can invest, which opens up opportunities for individuals to have a legitimate shot of outperforming the overall market. It's not necessarily easy to do, but it is certainly within the realm of what's possible for individual investors.
4. Investing is little more than legalized gambling
Investing and gambling share several features like the risk of loss, unknown outcomes in advance, and the possibility of making money with very little physical effort. That makes it easy to conflate them with one another, but there are key differences between the two. Key among them is that the odds are stacked in the casino's favor in gambling, making it likely that the gambler will lose money. On the flip side, investing in the stock market gives investors a positive expected return over time.
This is because when you invest in a stock, you're not just buying a single win/lose outcome, you're buying an ownership stake in a business. That business typically has multiple opportunities to make a worthwhile product, attract customers, and ultimately deliver a profitable outcome for its owners. In addition, a company that achieves profitability has the potential to sustain itself from its operations, allowing it to provide continuing returns to its owners for their initial investment.
Of course, you do still have a chance of losing money on your investments, particularly in the near term or if the companies you buy struggle or fail. That's why it's important to invest with a long term perspective and to invest with an eye toward diversification in order to improve your odds of success over time.
Make 2021 your year
With these myths adequately busted, you can use your newfound knowledge to make better decisions for yourself and your money in 2021. So start the year off right and make 2021 a more profitable year for your investments.