Myths about the stock market can conjure up images of ruthless investors in slick suits, taking money from the working class. It's time to abandon those myths -- and the fear they inspire. Here are five common misbeliefs about investing, dispelled.
1. You must have money to make money
If Ronald Read were alive today, he might laugh at the notion that you need money to make money in the stock market.
Read was a gas station attendant and janitor who died in 2014. Given his job history, his income probably topped out at something less than $25,000 a year. (ZipRecruiter pegs the national average salary for a janitor today at about $25,000 annually.)
Image source: Getty Images.
At the time of his death, Read was worth nearly $8 million. He achieved multimillionaire status by investing in blue chip, dividend-paying stocks for decades. He didn't get rich because he had a seed fund. He got rich because he had patience and discipline.
2. Investing requires expertise
You don't have to be a financial whiz to invest. In truth, you can start investing with three pieces of information. First is the Rule of 110, which tells you how to divvy up your portfolio between stocks and bonds. Subtract your age from 110 and the answer is the percentage of stocks to hold. At age 35, for example, your portfolio would be 75% stocks and 25% bonds.
Second, you can fulfill these stock and bond percentages with ETFs. An S&P 500 index fund can provide your stock exposure, and a Treasury debt fund delivers bond exposure.
Third, fund expense ratios are decision factors. A fund's expenses reduce investment returns. If you are comparing two funds with the same portfolio -- say, two S&P 500 index funds -- the one with the lower expense ratio should deliver higher returns.
That's the condensed know-how you need to build a workable portfolio. You can and should take the initiative to learn more as you go. But you don't have to be an expert on day one.
3. Investing is too risky
You can lose money in the stock market. You can also wreck your car while driving, break your ankle while walking down stairs, or start a fire while making fried chicken. Still, you drive, attend basement parties, and cook. You can invest, too, with the right precautions.
A broad ETF spreads your risk across many different positions. But you can also take a more targeted approach to insulate yourself from volatility. Choose quality stocks that pay dividends and have a history of resilience in market downturns. Look to utility companies, makers of consumer staples, discount retailers, and healthcare companies. These sectors often show less volatility when times are tough.
You should also plan on holding your stocks (and funds) for many years. The stock market has never lost value in a 20-year timeframe. That doesn't mean it won't happen in the future -- but you can reasonably expect to see less volatility over longer timeframes versus shorter ones.
4. You need to beat the market
Beating the market is overrated. Don't get me wrong -- it's fabulous when it happens. But you don't need to beat the market to make money.
If you start investing early enough, market-level returns of 7% after inflation are enough to make you wealthy. Give yourself 30 or 35 years, for example, and the market can carry you to a million bucks with a monthly investment of $600 to $900.
There's no shame in taking what the market gives you, especially if it makes you a millionaire. If you like the competitive aspect of trying to beat the market, you can dedicate 5% of your portfolio to speculative plays. That way, missteps won't take you out of the game.
5. Cash is safer
Cash is safer than investing in one respect only. It doesn't fluctuate in value the way stocks do. The trade-off is that cash always loses buying power to inflation over time. For that reason, I'd argue that cash isn't truly safer than investing -- but it is complementary.
You need cash for liquidity and stability. And you need stocks to outpace inflation. It's tough to build wealth with one or the other. It takes both.
Your profitable future
You don't need a bunch of money or a degree in finance to succeed in the stock market. You can do it with a simple portfolio, some cash on the side for emergencies, and a long timeline. There will be risk and you will see market volatility. But accepting those outcomes gives you a path to wealth -- and that is a worthy trade-off.
