The investing world is filled with myths that scare many people away from putting their money to productive use. Investment decisions based on misinformation can lead to poor returns or even heavy losses. Here are four of the biggest investment misconceptions you should avoid, and the investing best practices which can help you make the most of your money.
Investing Is Too Risky
One of the most common myths about investing is that it is essentially gambling. While price movements over the short term can seem random, investing for the future is all about buying and holding assets that will become worth more over time. In fact, diversified, long-term investing can help smooth out the volatility that defines the day-to-day movements of the market. Over the last 30 years, the benchmark S&P 500 stock index has returned 10.72 percent annually. Even if your appetite for risk is low, you can still create an investment portfolio that will allow your money to work for you.
In addition to investing for the long run, it is also important to . One of the best ways to do this is through . Passive funds track specific stock indices or sectors, allowing them to mirror the overall returns of the market. Investing in ETFs can also help diversify your investments and minimize risk, as it helps you avoid relying on the performance of any one stock, , market, etc. You can also diversify over time using dollar-cost averaging. This approach involves making regular purchases of an asset at set intervals, regardless of price. Using dollar-cost averaging, you can average out the purchase price of your assets and limit the effects of short-term volatility.
You Have to Be Rich
Another major misconception about investing is that it is only for the wealthy. In fact, anyone with spare money to set aside after expenses can begin investing. Many budget guidelines include room for investing, even on a modest income. The 50/30/20 rule, for instance, suggests that you should save or invest 20 percent of your income. Rules like this also work well with a dollar-cost averaging strategy, since they allow you to invest a set amount each month based on your income.
Even small deposits can grow to considerable sums of money over time, thanks to the power of compounding interest. A small amount of money can generate earnings over time when invested, which can be re-invested to earn you even more interest, and this process can go on and on indefinitely to help your money grow in the long-term.
If you do not have much money to invest, a can be very helpful. These automated investment advisors take your risk tolerance, budget, and goals into account and create an investment plan that is tailored to your needs and preferences. Robo advisors can also accept smaller deposit amounts, making them more approachable to casual or beginning investors.
You Can Time the Market
The idea that you can time the market is perhaps the biggest myth about investing that most people believe. While buying low and selling high sounds like a great strategy, it can be a recipe for financial losses. Selling when stocks crash is an especially large mistake since data going back to 1930 suggests that holding through bear markets is a far better approach for long-term gains, as . Rather than taking losses, investors can be far better off putting their money in stable, diversified portfolios to help ride out volatile periods.
You Need to Be an Expert
Many people think you need to be a market expert in order to invest successfully. With modern investing platforms such as robo advisors, you can get started with investing by answering some simple questions about your goals and risk tolerance. From there, your chosen platform will propose an investment plan that fits your needs and preferences, while automatically diversifying your holdings and helping you pursue a successful long-term investment strategy.
If you are interested in using this approach, you can begin investing and building wealth with . It can support in providing you with a diversified investment plan of stocks, bonds, real estate, and other assets that can help you work towards your financial goals.
