Laura reviews ten costly misconceptions about investing that you should never believe.
Laura reviews ten costly misconceptions about investing that you should never believe.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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Whether you're an experienced investor or want to become one, many myths can prevent you from being successful. Since it's not always easy to tell fact from fiction, this post will clarify ten costly misconceptions about investing that you should never believe.
Hi, friends, and thanks for joining me this week! I'm Laura Adams, an author, financial spokesperson, keynote speaker, founder of The Money Stack newsletter, and host of the Money Girl podcast with 43 million downloads.
And I have an exciting announcement … starting this week, you’re going to be getting more Money Girl! I have a backlog of your amazing money questions–so, I’m going to be answering them on an extra weekly Q&A episode on Fridays. The Friday show format will be a little more casual, so I’ll also have some time to update you on things going on in my world.
I hope you’ll enjoy the bonus shows! If you want to keep them coming and have a money question, please leave it on our voicemail line at 302-364-0308. You can also email me using my contact page at LauraDAdams.com.
10 costly investing misconceptions
1. Investing is only for the privileged and wealthy.
One of the worst misconceptions is that you can only be an investor if you're rich or an old white guy. Gallop found that 61% of American adults have money in the stock market, which is the highest amount they’ve seen since 2008. That's definitely more than only the wealthiest Americans!
If you're intimidated by investing because you're not Warren Buffett, it's time to start investing a little at a time. Investing $50 or $100 monthly is better than nothing and will grow over time, giving you more financial security.
Many online investing platforms like Betterment and Empower allow you to open accounts with no or low minimums, such as $500 or less. They charge low fees and may even offer financial advisory services if needed. But you don't need to speak with anyone or work with an advisor to become an investor, and I'll talk more about that in a moment.
If you have a low income, are young, a minority, or are clueless about investing, I hope this post will help you get comfortable with it and get started.
2. Investing means picking individual stocks.
If you've been a Money Girl reader or listener for any time, you've heard me talk about having a diversified portfolio to reduce investment risk. Having a mix of various stocks, bonds, cash, and other assets means you're less likely to see a significant drop in any of them simultaneously.
For most people, being diversified means owning one or more funds, like index, mutual, or exchange-traded funds (ETFs), which consist of hundreds or thousands of underlying assets. If you mistakenly believe that investing means trying to pick winning individual stocks or bonds, you'll be taking too much risk and probably paying too much in fees, which I'll discuss.
The bottom line is that investors are terrible at consistently forecasting which stocks will go up or down. It's virtually impossible, especially now that market information moves almost instantaneously.
3. Investing should be exciting.
If you mistakenly believe that investing is for thrill-seekers, like day traders, I want to reassure you that the more boring your investment strategy, the better. Good investing is measured and calm.
I'm a fan of ETFs because they trade on the market (like a stock), are incredibly diversified, and tax-efficient. For instance, if you buy a total stock market ETF, its price moves with the markets, which generally go up over time. You can create a plan like automatically investing $500 a month in an ETF regardless of its price, known as dollar-cost averaging (DCA).
That doesn't mean you can't have fun with alternative investments if you can afford potential losses. For instance, a small percentage of my portfolio is in Bitcoin and real estate investment trusts (REITs). Experimenting with less than 2% to 5% of your portfolio is a good target, but only if you already have healthy emergency savings and regular retirement account contributions.
4. You can beat the financial markets.
Trying to beat or time the market by knowing if an investment (such as an individual stock) will go up or down is a huge mistake. You'll lose money if you're overconfident, buy high out of excitement, and sell low out of fear.
Studies have proven that even actively managed mutual funds, with the fastest computers and highly skilled managers, routinely underperform the market. So, would you rather try to beat the market or match it with an index or exchange-traded fund? Unless you can predict the future, a consistent dollar-cost averaging investment strategy will help you build more wealth over the long term, even with the market's ups and downs.
It's surprising to many beginning investors that a set-it-and-forget-it, lazy mentality helps your portfolio more than reacting to market noise, trends, or economic shifts. Plus, excessive trading lowers your investment returns because it comes with fees.
ALSO READ: How much money do I really need to retire?
5. You shouldn't invest in uncertain times.
You're mistaken if you believe that the economy or financial markets are too uncertain or volatile to invest. Waiting until some ideal time to invest is trying to time the market, which doesn't work and will leave you missing its upswings.
While market volatility may seem alarming, it's actually good for your portfolio over the long term. Instead of being tempted not to invest or to invest less, you can buy more fund shares at a lower cost with a dollar-cost averaging strategy. That allows you to benefit more when share prices increase.
6. Investments always come with high fees.
Investment fees are difficult to avoid but vary depending on what you purchase and where you purchase it. For instance, if you work with a financial advisor, they may charge a flat fee or a percentage of your assets for their expertise in managing your portfolio.
Even if you don't work with an advisor, investment funds charge fees to cover costs like management and marketing. Retirement plans, like a workplace 401(k), come with a custodial fee for handling IRS reporting requirements.
But the good news is that many online investment platforms like Betterment and Empower charge relatively low costs, boosting your overall return.
7. You should take the most investing risk.
A common misconception is that you must take high risk to get the highest returns. While higher risk can lead to higher returns, there's much more to investing. Your risk tolerance is the risk you're willing to take to meet your investing objectives.
Stocks are the riskiest mainstream asset class. If you have a portfolio of 80% stocks instead of one with 40% stocks, you'll likely have a higher return over the long term.
However, you'll also experience more volatility. Your portfolio could plummet during some periods and take years to recover. Cashing out during a market downturn is one of investors' worst mistakes.
Most investing platforms ask you to complete a short questionnaire to assess risk tolerance and make portfolio recommendations. And you can typically dial your risk up or down as needed.
8. Investing is only about money.
Investing is about money–but it's also about time. Even if you don't have much to invest, you can achieve aggressive financial goals by regularly investing over a long period. It takes dedication, discipline, and balancing living in the present with delaying gratification to be successful.
According to the Federal Reserve, only 63% of American adults could cover a $400 unexpected expense with cash. Others are on a path to retire early known as the FIRE movement, which is short for financial independence, retire early. They practice extreme frugality to experience financial freedom as soon as possible. I think there's a middle ground to shoot for.
An essential concept that the wealthy understand is compounding. That's the ability for your earnings to grow their own earnings over time. A great way to understand it is the Rule of 72, which says your portfolio will double in size about every ten years with an average 7% return. In other words, if you begin regularly investing in your 20s, it will be difficult not to be a multimillionaire in your 60s.
9. You should pay off debt before investing.
You're making a mistake if you're waiting to pay off all your debt before investing. Yes, debt with double-digit interest rates should be tackled sooner rather than later. But you can build more wealth by investing and repaying lower-rate debts simultaneously.
RELATED: How much debt is too much? 8 warning signs
10. You must work with a financial professional to invest.
While a financial advisor can help define your investing strategy, working with one is not required. However, if you have much to invest or have a complicated financial situation, I recommend working with a pro.
If you're new to investing or prefer a do-it-yourself approach, consider an automated investing platform like Betterment or Acorns. As I mentioned, you typically start by answering questions to evaluate your risk tolerance. Then, the platform recommends a portfolio with a mix of funds that meet your requirement. It may also include regular rebalancing of investments as the market changes.
Whether you choose a financial professional or a robo investing platform, investing as early as possible is most essential for building wealth and reaching your long-term financial goals.
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That's all for now. Check back on Friday for the first of our weekly bonus episodes. And we'll be back with our usual Wednesday installment next week!
Until then, here's to living a richer life. Money Girl is a Quick and Dirty Tips podcast. It's audio-engineered by Steve Riekeberg. Our Director of Podcasts is Brannan Goetschius, our digital operations specialist is Holly Hutchings, our advertising operation specialist is Morgan Christianson, our marketing and publicity associate is Davina Tomlin, and our marketing assistant is Kamryn Lacey.