Investing in the stock market is one of the best ways to build wealth, but you'll need the right strategy to maximize your earnings while minimizing risk. Every move you make matters, and sometimes, even seemingly small mistakes or misunderstandings can limit your earning potential.
That said, it doesn't necessarily have to be difficult to make money in the stock market. By avoiding the following three common myths, you can set yourself up for more lucrative gains.
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Myth No. 1: It's unsafe to buy at all-time highs
The stock market has been on fire lately. The S&P 500 is up by nearly 58% from its lowest point in late 2022, reaching new highs nearly every day. But it can be daunting to invest when prices are at their peaks, especially if you're concerned that the market has nowhere to go but down.
Investing at all-time highs isn't as dangerous as it might seem, however. Over the long haul, continuing to buy consistently could help you earn far more than if you were to avoid the market.
For example, say you had invested in an S&P 500 index fund in January 2022 -- when prices were at their peaks and about to tumble into a bear market. That may have seemed like an awful moment to invest at the time, yet you'd have earned returns of more than 18% by today.
In hindsight, you could have earned more if you'd invested in late 2022 when prices bottomed out. But there's no way to know in the moment where the market is headed. By investing consistently and staying invested for the long run, you're far more likely to see positive returns than if you try to time the market.
Myth No. 2: Short-term investments can make you rich quickly
Short-term investments that make big promises can be tempting, but if it seems too good to be true, it probably is. While it's possible to make a lot of money in a short period of time, it often requires far more luck than skill. And if your timing is even slightly off, you could easily lose more than you gain.
A safer strategy is to invest in quality stocks and hold them for as long as they remain good investments -- ideally, decades. The strongest stocks are the ones from companies that are healthy at their core and are set up for long-term growth. These stocks may not experience explosive returns, but you're much less likely to lose money than you would be with risky short-term investments.
Myth No. 3: Small contributions won't go very far
If you can't afford to invest much right now, it's easy to simply put it off until you have more spare cash. But time in the market is more valuable than how much you invest, and the sooner you get started, the further those small contributions will go.
For example, say you can afford to invest $100 per month right now in a fund that's earning a 10% average annual rate of return -- which is in line with the market's historic average. Let's also say that in another scenario, you wait five years to begin investing, but then start contributing $150 per month (while still earning a 10% average annual return). Here's approximately how much you could accumulate over time in both situations:
| Number of Years | Total Portfolio Value: Investing $100 per Month Now | Total Portfolio Value: Investing $150 per Month in 5 Years |
|---|---|---|
| 5 | $7,000 | $0 |
| 10 | $19,000 | $11,000 |
| 20 | $69,000 | $57,000 |
| 30 | $197,000 | $177,000 |
Data source: Author's calculations via investor.gov.
Small contributions can go further than you might think, especially if you start investing early. Rather than waiting for the perfect time to buy, it's often best to begin now, regardless of how much you can afford to invest.
Choosing the right strategy can help supercharge your earnings in the stock market, and it's simpler than you might think. By avoiding these three common myths, you'll be on your way to generating long-term wealth.
