15 Money Myths All Investors Should Avoid Like the Plague
15 Money Myths All Investors Should Avoid Like the Plague
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Too many people believe too many myths about money, and some of the myths can be hazardous to their wealth. For example, money can sometimes buy happiness -- if, for example, having a house by a lake will bring more of your family together for wonderful times and great memory-making. Here are 15 myths you shouldn't accept as truth.
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1. You're young -- you can put off investing
It's easy to assume there's no rush to start investing in stocks. There are many, many years until you'll be retiring, after all. But those many, many years are extremely powerful, if you invest throughout them. A single $1,000 investment made when you're 25 will have 40 years in which to grow until you hit age 65. Growing at an annual average rate of 8%, it will become more than $21,700. If you invest it at age 35 instead, giving it only 30 years to grow, it will only become about $10,000 -- half as much. Now imagine socking meaningful sums away regularly starting when you're young -- and you'll see that you can amass many hundreds of thousands of dollars, or even millions of dollars, for your later years.
ALSO READ: 3 Investing Myths That Cost Me Thousands of Dollars
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2. You're kind of old -- it's too late to start investing
If you're in, say, your 50s, you might reasonably be assuming that it's not worth starting to invest in stocks now, because you don't have decades until retirement. Think again. If you're 55, you may have a full decade of investing ahead of you -- and plenty of people retire at age 70 or later, so you might have 15 or more years. You can grow your money meaningfully over such a period. Note, too, that when you retire, you shouldn't necessarily be selling all your stocks. Retirement is likely to last a few decades, and you probably won't need to touch a big portion of your nest egg for at least a decade or more -- you might keep that portion in stocks, where they are likely to grow the fastest.
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3. You aren't rich enough to invest
In the old days, you often had to buy at least 100 shares of a stock at a time, meaning that if you were interested in a stock priced at, say, $88 per share, you'd need $8,800 -- a sum that lots of people can't afford to invest at one time. Today, though, you can buy as little as a single share of stock at a time -- and with many brokerages now charging $0 per trade, that's a perfectly good option, if one or a few shares are all you can afford at the moment. There is even such a thing as buying fractions of shares, which can help you get into stocks that trade at very high prices. Many brokerages permit fractional share buying.
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4. You aren't smart enough to invest
This is another common financial myth. The world of investing can indeed be intimidating when you first approach it, but investing in the stock market can be very simple. Those who want to chase the highest possible returns may read lots of books on investing and may study hundreds of companies, but that's not necessary for effective stock market investing. Instead, you can simply learn a little about index funds and then invest in one or more low-cost index funds regularly. They're mutual funds that track indexes such as the S&P 500 index of 500 major American companies, and your money will instantly be invested in much of the American economy.
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5. A home is a good investment
This is a common misconception. Yes, your home may appreciate in value over time, but over the long haul, stocks have appreciated at a much faster clip. There are ways to make money in real estate, but don't assume that your home will be making you rich. You might instead invest some of your money in real estate investment trusts (REITs) if you're interested in profits and income from real estate.
5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.
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6. Gold is a good investment
Gold is not the great long-term wealth builder that many people assume it is. Yes, you may make a tidy profit it you happen to buy and sell it at opportune times, but it can be hard to know when those are. Consider that, per the research of University of Pennsylvania professor Jeremy Siegel, between 1946 and 2012, the average annual real return of gold was about 2%, with the even broader 1926 to 2012 period featuring an average return of 2.1%. (A "real" return is one that accounts for inflation.) Over the same periods, stocks averaged 6.4%. Warren Buffett has dissed gold many times, pointing out how unproductive an asset it is. If you're still interested in it, know that there are many ways to invest in gold, some better than others.
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7. Cryptocurrency is a good investment for you
Cryptocurrencies are very popular these days, mainly because many of them have soared in value, making their investors a lot of money. They're very complicated assets, though, and very volatile, too -- plenty of investors have been burned when the price of a cryptocurrency has crashed.
Cryptocurrencies are not great investments for most of us -- at least those who aren't going to spend a lot of time developing a good understanding of them. If you are really interested, though, perhaps invest just a small portion of your portfolio in them -- after you've read up on them.
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8. Debt is bad
Debt can certainly seem like a bad thing -- it leaves you with obligations to another party or parties, and that can limit your ability to spend money on other things. It's the same with companies -- if they're on the hook to make sizable payments regularly on their debt, it means they may not have sufficient funds to do other things, such as buy another company, increase dividend payments, buy back shares, etc.
On the other hand, though, debt can be good! Without it, few of us would be able to buy homes or cars. Without it, many companies may not be able to get certain things done or even stay afloat. Debt just needs to be manageable -- which means not too onerous an interest rate (such as steep credit card rates) and not too heavy a debt burden. If you are carrying a lot of credit card debt, pay it off as soon as you can.
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9. Invest now, pay off your debts later
Speaking of debt, if you're carrying a lot of it, some might advise you to just start investing instead of paying off your debt, because you can make more from your investments with which to pay off your debt. That's not likely to work out well.
Consider that the average long-term return of the stock market is around 10% annually. Even if you turned out to be an excellent investor and you averaged 15% annually, many credit cards these days charge 25% or close to 30%. Earning 15% on your investments while paying 20% or more on your debt will keep you from getting ahead. Pay off any high-interest-rate debts before investing.
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10. Dividends are boring
No one should be thinking that dividends are boring, because they can turbocharge your portfolio's growth powerfully. Remember that dividends from healthy and growing companies will arrive regularly no matter what the economy is doing, and they will likely be increased over time, too. On top of that, the share prices of the underlying stocks are likely to grow over time. They're also especially powerful income generators for those in retirement: Imagine a $500,000 portfolio with an overall average dividend yield of 3% -- that would generate $15,000 annually.
5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.
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11. Boring stocks are boring
It's a big mistake to assume that companies that make you yawn are not going to deliver exciting growth for your portfolio. Think, for example, of Sherwin-Williams, the paint giant. Over the past 10 years alone, it has grown by more than 1,100% -- nearly 29% annually -- and that's not even with dividends reinvested. Meanwhile, Target has averaged about 18% annually over that same period, while payroll processing titan Automatic Data Processing has also averaged 18%. The S&P 500 only averaged about 15.3% during the past decade. (That 15.3% is well above the long-term average return for the stock market, by the way.)
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12. Penny stocks can make you rich fast
It's easy to fall for penny stocks, especially if you're new to investing. They're stocks that trade for less than about $5 per share, and they're notoriously volatile and risky, in general.
You might, for example, see a $0.10-per-share penny stock hyped online because "it's working on a cure for cancer." You run the numbers and see that a mere $500 investment can get you 5,000 shares, which sure seems like a lot. And $0.10 per share sure seems cheap -- if it only rises to $0.50 peer share, you'll quintuple your investment. Unfortunately, a low price is not the same as a cheap price. Many $0.10 stocks are far more likely to fall to $0.01 or below than to double. And a $1,000-per-share stock may be a bargain, on its way to doubling in a few years.
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13. You don't need life insurance
Another financial myth is that you don't need life insurance if you're single or childless. That's not necessarily true. Think about whether anyone depends on you financially, and think about what they would do if you were gone. You might have parents, for example, who depend on you -- or will, some day. You might have nephews or nieces you could be assisting over the years. You might have a business, too, that would run aground without you at the helm.
Life insurance is not simply a jackpot for someone if you die -- it exists to protect your income stream for those who may depend on it.
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14. Don't talk about money with friends and relatives
It's a common myth that we shouldn't talk about money and financial matters with our friends and relatives. Some say it's impolite to do so. That's a shame, because many of us would greatly benefit from sharing our experiences and lessons with loved ones, and benefit from hearing theirs. Start a new trend with those around you. Broach the topic. Talk about your struggles paying off debt or your financial goals or your experiences investing in stocks. Don't jump into any stock anyone recommends without due diligence, though.
ALSO READ: Have $500? 2 Absurdly Cheap Stocks Long-Term Investors Should Buy Right Now
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15. You can't retire early
Lastly, many people assume that early retirements are only for the wealthy. It doesn't have to be that way. It could be for you, too, if you invest early and aggressively and you have a plan that you execute well. A lot will depend simply on your determination. So crunch some numbers, perhaps consult a financial planner, and see how quickly you can amass a big enough nest egg to retire on. Look into what income streams you can set up for yourself, too, such as Social Security, dividend income, pension income, a side gig, and so on. Annuities and a reverse mortgage might be part of your plan, too.
5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.
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The more you know, the better you'll do
It's worth spending some time regularly reading up on financial matters, in order to glean some tips and guidance that could save you hundreds or thousands of dollars on insurance, taxes, banking, and so on. You can also learn more about investing, to increase the odds that you'll be good at growing your nest egg.
Selena Maranjian has no position in any of the stocks mentioned. The Motley Fool recommends Sherwin-Williams. The Motley Fool has a disclosure policy.
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