5 Investing Myths Debunked
Is putting money in the bank really safe?
Investing in the stock market often seems daunting due to widespread misconceptions.
Understanding and debunking those myths is crucial for anyone looking to build wealth over the long term.
In this article, we’ll debunk five common myths about investing to help you navigate the world of stocks with confidence and clarity.
Myth #1: Putting Money In the Bank Is Safer
Many people believe that keeping money in a savings account is the safest option.
While it is true that bank deposits are protected and stable, they offer very low returns.
Over time, inflation can erode the purchasing power of your savings, meaning that your money could lose value in real terms.
In contrast, investing in the stock market, despite its ups and downs, has historically provided higher returns that can outpace inflation, helping to grow your wealth over the long term.
Myth #2: Investing Is Risky
Many people believe that investing in the stock market is a surefire way to lose money due to its perceived riskiness.
While the stock market is indeed volatile and can fluctuate widely on any given day, this doesn't inherently mean it's risky.
Chuck Akre, whose Akre Focus Fund has achieved an annualised return of around 15% since 2009, clarified:
“When we speak of risk, we are not speaking of share price volatility. Share price volatility provides us with opportunity. When we speak of risk we are thinking about exposure to permanent loss of capital.”
By performing thorough investment research and investing in a diversified portfolio of stocks over the long term, investors can significantly reduce the likelihood of permanent losses and harness the market's growth potential.
Myth #3: Investing Is Only for the Wealthy
The belief that investing is a privilege reserved for the wealthy is totally not true. Even someone with an ordinary income can create massive wealth.
Everyone can invest and should invest, at least to beat inflation, as mentioned earlier.
With the advent of robo advisors and fractional investing, individuals can start investing with as little as a few dollars.
Moreover, the power of compound interest means that even small, regular contributions (of say $50 per month) can grow substantially over time.
Myth #4: I Need To Have High IQ To Invest
Contrary to popular belief, investing does not require an extraordinary intellect.
The most important traits for successful investing are patience, discipline, and a willingness to learn.
“Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”
— Warren Buffett
Many of the world's greatest investors, like Warren Buffett and John Bogle, emphasise the importance of keeping things simple.
Basic financial principles and strategies, such as investing in index funds and staying the course during market downturns, are often more effective than complex financial manoeuvres.
Educational resources like The Compounding Dad are widely available to help anyone become a competent investor without needing a high IQ.
Myth #5: You Can Predict Stock Market Movements
While it’s tempting to seek explanations for every market movement, the reality is that short-term fluctuations are often random and driven by a multitude of factors.
Economic data, geopolitical events, and market sentiment can all influence stock prices, but their impacts are difficult to predict. Even professional investors struggle with predicting market movements accurately.
Rather than trying to understand every market move and timing the market, successful investors should focus on the long term and dollar-cost average in a diversified stock portfolio diligently.
Despite numerous ups and downs, the overall trend of the stock market has been positive over the long run, rewarding those who had “time in the market”.
Myths Galore
While we looked at a couple of investing myths above, the stock market is full of many other misconceptions.
What are some others you can think about? Share them in the comments below!