Ever felt like you’re tiptoeing on the edge of the pool of wealth building, scared to take the plunge into the world of investing? The fear of the unknown, unfamiliar jargon and the ever-changing stock market can leave even the bravest souls hesitating.
Now, I get it – the mere thought of putting your hard-earned dollars in an investment account might make your palms sweat. You might be thinking, “I need a ton of cash to start, and what if I pick the wrong stocks and tank my savings?” Take a breath, my friend. Let’s talk about these fears and help you feel equipped with the knowledge to take the next step in your financial journey.
Spoiler alert: You don’t need a fortune, and the stock market isn’t a treacherous maze. Your worries are valid, but what if I told you that by the end of this journey, those fears might just turn into a roadmap for financial success? Intrigued? Well, grab that coffee, settle in, and let’s debunk these myths together. The path to financial empowerment starts here.
Myth #1: “I need a lot of money to get started in investing.”
Contrary to popular belief, you don’t need a large sum to begin investing. Time is your best asset, capable of multiplying even a modest starting amount exponentially through the magic of compound interest. To get started in investing, it might be helpful to follow these guidelines:
- Start Small, Start Now: Even $5 or $20 a month can kickstart your investment journey. Time is on your side, and consistency matters more than the initial amount.
- Choosing the Right Account: Begin by deciding on an investment account. Most workplace retirement plans allow you to contribute a small percentage of each paycheck. Many mutual funds and brokerage accounts now allow you to invest, small dollar amounts to get started. You can opt for a regular account or an IRA (Individual Retirement Account) that gives you tax advantages as a starting point.
- Selecting a Mutual Fund or Brokerage: Similar to choosing a bank for your first checking account, select a mutual fund or brokerage for your investment portfolio that allows a selection of investments that meet your needs at a reasonable cost.
If you find yourself burdened by high-interest debt or lacking an emergency fund, prioritize addressing these before delving into investments. Seek guidance from your money mentor to assess if it’s the right time. Once you make sure your financial priorities are in order, take the first step by deciding on the type of account that suits your goals. Whether it’s an IRA, a brokerage account, or a consultation with a robo-advisor, the journey to financial empowerment begins with your decision to start. Don’t let this myth hold you back – dive into the possibilities today.
Myth 2: “I need to know how to pick and choose stocks to be successful.”
Now I know what you are thinking, once you get to the brokerage, what if they present the entire stock market to you and ask you to pick your stocks?
Unlike how Hollywood portrays it, that scary scenario is not required by any means to become a successful investor. Rather than trying to predict individual stock performance, consider the benefits of diversification.
Many employer retirement plans and mutual fund companies have target date funds. These are a type of mutual fund that will diversify your portfolio to fit your investment needs over time. As an example: A 25-year-old that wants to invest for retirement at 65 could pick a 2065 or 2070 target date fund that will automatically select a mix of funds that are appropriate for that goal. As time goes on the fund will adjust to reduce the risk as you get closer to your target date.
Diversifying your portfolio through index funds or exchange-traded funds (ETFs) typically provides a more stable and less risky approach than trying to navigate the complexities of selecting winning stocks as a beginner. From a visual perspective, these diversified accounts allow you to put your money in a “basket” of investments, rather than putting it all into your favorite brand. Time in the market is much more important than timing the market.
Myth 3: “It’s too risky – It’s safer to keep my money in savings.”
While the safety of a familiar savings account might seem appealing, leaving your money in a low-interest savings account or under the mattress exposes it to the risk of inflation eroding its value over time. The truth is, there are more secure and lucrative options that can shield your money from the effects of inflation. To show you that, let’s dive into some hard numbers from Forbes:
- From 2018 and 2021, the US average for savings rates fluctuated between 0.01% to 0.10%, making savings a guaranteed financial loss. Even with the 2010s’ relatively low inflation rates of 1% to 2%, money held in saving accounts was a depreciating asset.
- In 2021, inflation jumped to 4.7%, due to the COVID-19 pandemic, while savings account interest rates did not change, and hovered between 0.06% and 0.07%.
- In 2022, inflation jumped to a staggering 8.0%, which meant the money in your savings account was worth less than the year before.
The interest you earn in your average savings account will not protect your hard-earned money from the effects of inflation. In fact, investment accounts are also greatly affected by inflation, but the difference is, the overall return of an investment account is significantly higher. According to NerdWallet, “The average stock market return is about 10% per year, as measured by the S&P 500 index.” This high return is what makes investing so much more lucrative than merely keeping your money in the bank.
It may be easier to consider investing if you split your investments into short, medium and long term buckets. Short-term money is anything you might need in the next two years (like an emergency fund or a down payment for a big purchase). Short-term money is probably best suited for savings or cash equivalents. Long-term investments are anything that you won’t need for at least five years or more. This allows you to ride out the short-term ups and downs of the market and benefit from higher average returns, since you know you won’t need the money right away. You can feel more comfortable staying the course.
From a conceptual basis, saving and investing have a lot in common because they share the same goal: helping you accumulate money and prioritize your future self. Although saving does not carry the inherent risk associated with investing in the stock market, it still carries some risk, because it is vulnerable to inflation. To get a better idea of what your risk tolerance is in financial decisions, you can take a quiz or speak with your money mentor.
Myth 4: “I need a financial advisor to invest.”
There is no strict line on when it would be a good idea to bring in a financial advisor, but it is not true that you need one to start. While they offer valuable expertise, you can empower yourself to make informed decisions without solely relying on external guidance.
For many people, there is often a middle ground between fully “DIY-ing” your finances and hiring a professional advisor. In the investing space, technology has been used to great effect to help people make good investing decisions. Many brokers use robo-advisors to help their clients invest by calculating their age, risk tolerance, and other factors to make decisions. The scenario where they are managing a portfolio of millions of dollars is rarely the case for most investors, so one of these “in-between” options can be a preferable option. While financial advisors are excellent resources to many, they do come at a cost. That cost is usually taken in the form of a percentage off the top of your overall growth in the market, and in the long run can add up to a significant sum. It is important to keep this in mind as you make the decision of what form of help to seek in your investing decisions.
Myth 5: “I’m young, I have plenty of time… I’ll start later.”
Taking a “YOLO” (You Only Live Once) approach to your saving goals can be a problematic strategy. This myth of “I will start investing later – that is for when I am far along in my career” is one of the most damaging because it makes you miss out on the time value of money.
Let’s take this as an example: If you started investing at 20, assuming a 10% return, it would only take you $115 a month to become a millionaire at age 65. Alternatively, if you started at age 50, it would take you $2,600 a month to do the same thing. This is an incredible difference in the monthly amount needed to be a millionaire!
Instead of assuming time is an infinite resource, recognize the power of compounding. Starting to invest early allows your money to grow over time. Delaying your investment journey can result in missed opportunities for wealth accumulation and meeting your retirement goals.
Myth 6: “Investing is too complicated and time-consuming.”
While this is a pervasive assumption, for many people investing is a lot simpler than you would think. With the rise of user-friendly investment platforms and automated systems, the process of setting up automated contributions and investing has become more straightforward. For Malia a.k.a. “Little Miss Finance” – she has over $100,000 invested in the stock market and she spends less than 1 hour per year managing her investments. Just think, that is one episode of the Great British Baking Show! If you spend 1 hour per year on your investments, just think about the profit you could gain over your lifetime.
For those of us who struggle with being a “Nervous Nellie” about our money, it alleviates so much pressure because there is no need to constantly check your investment or watch it increase or decrease daily. Keeping in mind that time spent in the market is the most crucial factor in investing, it greatly simplifies the process and for most people, turns the management of your portfolio on autopilot. For more strategies on how to invest easily, ask your Money Mentor.
Myth 7: “I need to try to time the market, to get in at the right moment.”
In recent times, the rise of Reddit investors and the allure of new and risky investment strategies have been on the forefront of the news. From the excitement of meme stocks to the frenzy of cryptocurrencies, some investors believe they can outsmart the market by predicting short-term movements. However, it’s crucial to understand the drawbacks associated with these approaches.
Attempting to time the market can be akin to chasing shadows. The volatile nature of new and trendy investments can lead to significant losses. The so-called “right time” to invest is elusive, and market timing rarely proves successful as a long-term strategy. Reddit investors, while passionate, may find themselves caught up in the hype, risking financial stability. The truth is consistent, long-term investing tends to outperform attempts to time the market. Regular contributions to your investment portfolio, regardless of market timing, can lead to steady and reliable growth over time. The concept of dollar cost averaging suggests that contributing the same amount on a regular basis over a period of years will end up giving you a better than average price per share since you buy less shares when prices are high and more shares when prices are low.
Rather than chasing trends, focus on building a well-diversified portfolio aligned with your financial goals.
Myth 8: “Men make better investors.”
It’s a common misconception that investing is a male-dominated arena. According to a recent poll performed in 2017, 91% of women surveyed said that they thought men made better investors than women. Although it is a prevalent belief, it could not be further from the truth. Research suggests that women can actually be better investors than men, taking less unnecessary risk and responding well to market volatility. Additionally, women were found to be more passive in the stock market, which increased their earnings. A common misconception is that the more active you are in the stock market, the better your returns. A study from the University of California, Berkeley found that men trade 45% more frequently than women, and all that trading reduced their returns by 2.65% per year (while women’s trading reduced their returns by 1.72% per year). This study suggests that the passive investing strategy that women are more likely to employ tends to be better in the long run.
For another thing, on average, women tend to have longer life expectancies, emphasizing the need for long-term financial planning and a robust investment strategy. If you are someone, especially a woman, who feels uncomfortable diving into the world of investing, consider the following:
- Educate Yourself: Take the time to learn about different investment options. There are numerous resources available within the Mentoro platform, from online courses to financial literature.
- Long-Term Focus: Embrace a long-term investment mindset. Women, with their longer life expectancy, can benefit from a patient approach that aligns with their financial goals.
- Professional Guidance: If needed, seek counsel from your Money Mentor. They can point you in the right direction. Having a trusted mentor can provide valuable insights and help tailor an investment strategy to your unique circumstances.
It is important to note, successful investing is not determined by gender but by informed decision-making and a commitment to long-term financial goals.
Myth 9: “It takes a lot of time to manage investments.”
Managing investments doesn’t have to be a time-consuming task. Consider practical examples of low-maintenance approaches:
- Passive Investing: Explore passive strategies like investing in index funds or exchange-traded funds (ETFs). These options require minimal oversight, allowing you to enjoy the benefits of investing without constant monitoring.
- Set-and-Forget Portfolios: Create a set-and-forget portfolio by carefully selecting a diversified mix of assets. Rebalance the portfolio periodically to maintain the desired allocation but avoid frequent adjustments.
- Automate Contributions: Set up automatic contributions to your investment accounts. This not only ensures consistency but also reduces the time spent actively managing your portfolio.
- Automatic Rebalancing: You can also set up certain accounts to automatically rebalance and given periods (quarterly, semiannually or annually). This allows you to tell the system to sell some of your funds that have done well and buy more funds that have done poorly.
In dispelling the myths surrounding investing, one truth stands out: the journey begins now. You don’t need a large sum, and waiting for the perfect moment is a myth itself. Success is not about timing the market; it’s about consistent, long-term commitment. The key is to start today – be it through robo-advisors, set-and-forget portfolios, or automated contributions. Overcoming these myths paves the way for your financial journey, propelling you toward growth and empowerment. It’s time to let your money start working for you.
The educational content provided in Mentoro’s articles is not to be considered as financial advice. Mentoro does not endorse specific investment actions or products. Readers are urged to independently research and consult with a qualified financial advisor before making any investment decisions. Investing involves risks, and individuals should seek expert counsel tailored to their unique circumstances for personalized guidance.