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Let's Abandon These 3 Stock Market Myths for a More Profitable Future

By Katie Brockman - Mar 6, 2021 at 7:00AM

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Make the most of your money by avoiding these myths.

Whether you're a novice investor or have been investing for years, it can sometimes be difficult to separate fact from fiction when it comes to the stock market.

While some myths and misconceptions may seem harmless, they can cost you more than you think. By abandoning these potentially dangerous stock market myths, you can help your money go further and avoid making expensive mistakes.

Wall Street sign with flags in the background

Image source: Getty Images.

1. You need to have a lot of money to start investing

Investing can be expensive, especially if you're investing in individual stocks. Some stocks can cost hundreds of dollars (or more) per share, and you can easily spend thousands of dollars building a diversified portfolio.

However, investing doesn't have to cost you an arm and a leg. In fact, there are ways to get started in the stock market for just a few dollars.

One option is to invest in low-cost index funds. Index funds are large collections of stocks or bonds, and each fund may contain hundreds or thousands of stocks from a variety of industries. They're also passive investments, meaning they don't have a fund manager selecting stocks included in the fund. This makes them less expensive than actively managed funds, saving you money.

If you'd prefer to invest in individual stocks, one affordable strategy is to invest in fractional shares. With fractional shares, you're investing in just a small portion of a single share of a company's stock. So, for example, if you have your eye on Amazon but can't afford to pay roughly $3,000 for a full share of stock, you can buy a fractional share for as little as $1.

2. You have to do loads of research before you invest

If you're not keen on doing a deep dive into a company's history and business fundamentals, investing can seem like more trouble than it's worth. Although investing in individual stocks does require a fair amount of research, not all investments require this much effort.

One type of investment that's perfect for hands-off investors is an S&P 500 index fund. This is a fund that contains all of the organizations within the S&P 500, which are some of the largest publicly traded companies in the country.

S&P 500 index funds are fantastic in that they do most of the heavy lifting for you. When you invest in this type of fund, you're instantly investing in 500 large companies across multiple industries. This means you don't need to worry about building a diverse portfolio, because S&P 500 index funds already provide instant diversification.

In addition, S&P 500 index funds track the market as a whole, making them less susceptible to market volatility. The stock market as a whole has always recovered from every downturn it's ever experienced. Because S&P 500 index funds follow the market, they're very likely to bounce back from market crashes as well. All you need to do is invest your money and then leave it alone for as long as possible.

^SPX Chart

^SPX data by YCharts

3. A market crash will ruin your finances

Market crashes can wreak havoc on your investments, but the good news is that with the right strategy, you may not lose any money at all over the long term.

Technically, you don't actually lose money unless you sell your investments. Say, for example, you buy 10 shares of stock priced at $100 per share. At this point, your investments are worth $1,000.

Now let's say the market crashes tomorrow, and the stock price falls to $60 per share. Your investments are now only worth $600. If you were to sell all your shares at this price, you'd have lost $400. But let's say that instead of selling, you wait it out until the market recovers, and the stock price eventually returns to $100 per share. Your investments are once again worth $1,000, and you're back where you started.

Strong stocks or funds are more likely to survive market crashes. As long as you don't panic-sell your investments when the market takes a turn for the worse, you shouldn't lose any money.

The world of investing can be confusing, but don't let these myths trip you up. Investing isn't as expensive or difficult as it may seem, and by getting started now, you'll be on your way to building long-term wealth.

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