The 10 Biggest Myths About Investing

By Tim Lemke on 7 December 2015 0 comments

There's a lot of information about investing floating around. There are also a lot of bad opinions, misconceptions, and flat-out lies.

Knowing the difference between myth and reality is your ticket to hitting your investing goals. Here are 10 of the biggest myths about investing:

1. It's Hard to Get Started

If you've never invested money before, it can seem intimidating — and you may not even know where to begin. But the reality is that it's never been easier to get started with investing. It's simple to open a brokerage account or Individual Retirement Account (IRA) online, and there's a wealth of great information available to investors for free on the web. If you work for a company that offers a 401K plan, you are usually automatically enrolled. All you have to do is read up on the investment choices and decide how much money you want to put aside.

2. You Need a Lot of Money to Make a Lot of Money

There were days when stock brokers wouldn't even take your calls unless you were willing to invest thousands of dollars. Nowadays, it's possible to open a brokerage account and invest just a share at a time. Granted, transaction fees can make it worthwhile to invest larger sums at a time, and some investment accounts have minimum requirements — but you generally don't need to be rich to get started. A modest amount of cash set aside at regular intervals can result in a big nest egg upon retirement. Consider that even a person making $30,000 a year and setting aside 5% of their income over 30 years will end up with more than $150,000, based on a 7% annual return.

3. It's Overly Risky

Investing is not without risk, but you are fully in control of how much risk you want to assume. If you're the skittish type, there are plenty of investments, such as bonds and dividend stocks, that will allow you to make money without much risk. And it's important to remember that while stocks can go down in value quickly, they have historically always rebounded. Since the Great Depression, there have been fewer than two dozen down years for stocks.

4. The System Is Rigged

You will often hear this from critics of our financial system. I won't suggest that our system is perfect, but to call something "rigged" is to suggest that the average person can't succeed. The truth is that for the average person, it's easy to buy stocks, bonds, and other investments in a straightforward and transparent way, and make money doing it.

5. Past Performance Indicates Future Returns

It's tempting to buy an investment because it has done well in the past. And it's generally true that if a stock has generated a solid return over a very long period of time, it's a good bet moving forward. But there's absolutely nothing to prevent an investment from tanking even after years of great returns. And it certainly doesn't make sense to invest in something based on the performance of the previous few months.

6. Investment Professionals Know a Lot More Than You

I don't want to disparage fund managers and analysts, but there is a growing body of evidence that no one, not even the most experienced professionals, can consistently beat the performance of the overall stock market. If you put money in an index fund that tracks the overall stock market, there's a good chance you'll do as well or better than the hotshots on Wall Street.

7. You Should Try to Get Stocks During an IPO

Initial public offerings get a lot of headlines, and it may seem desirable to get in at the ground floor. Examples abound, however, of companies that failed to come out of the gate strong. In fact, many companies have seen share prices dip well below IPO levels. (Facebook is the most recent prime example of this.) For most investors, it makes sense to wait after an IPO to see how things go. If you're investing for the long haul, waiting won't hurt you too much. In fact, you may even get a better bargain.

8. You Need to Have [Insert Investment Here] in Your Portfolio

You'll get a lot of advice from people telling you that you need a specific type of investment to optimize your returns. But there is rarely a single investment that should be considered a must-have. There are a million ways to build a collection of investments that will help you get rich; the best advice is to diversify and have a long investment horizon.

9. Gold Is Always Great

You may assume that gold is an amazing investment. I mean, it's gold right? And there has to be some reason there are advertisements for gold on TV all the time. The truth is that gold can be a great investment, but only at certain times. It's worth having some in your portfolio to stay diversified, but gold has taken a beating recently. Shares of the SPDR Gold Trust are down nearly 15% in the last three years.

10. $1 Million Is a Magic Number

One would think that becoming a millionaire means you're set for life. Not these days, however. Thanks to inflation and longer life expectancies, a million bucks may not be enough for most people to live long and retire comfortably. It's a good sum of money, but if you want your money to last 25 to 30 years, you're probably going to want double that — or even more, if possible. This means saving as much money as you can, as early as you can.

Do you adhere to these — or other — myths about investing?

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Guest's picture
Martin

"Shares of the SPDR Gold Trust are down nearly 15% in the last three years."

I can't say I'm surprised about GLD sinking in particular. Paper gold GLD claims to be fully backed by physical gold bullion but yet it refuses to give retail investors the right to redeem for any of these ‘claimed’ gold bullion. This fact alone would mean GLD shares are nothing more than paper at the end of the day. Furthermore, GLD’s prospectus is chalk full of weasel clauses and legal loopholes that allows the fund to get away without the full physical gold backing. One good example of this is the clause that states GLD has no right to audit subcustodial gold holdings. To this day, I have not heard of a single good reason for the existence of this audit loophole. I’ve also verified the following to be true and welcome everyone else to do so:

"Did anyone try calling the GLD hotline at (866) 320 4053 in search of numerical details on GLD's insurance? The prospectus vaguely states "The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody." When I asked about how much of the gold was insured, the representative proceeded act as if he didn't know and said they were just the "marketing agent" for GLD. What kind of marketing agent would not know such basic information about a product they are marketing? It seems like they are deliberately hiding information from investors.

I remember there was a well documented visit by CNBC's Bob Pisani to GLD's gold vault. This visit was organized by GLD's management to prove the existence of GLD's gold but the gold bar held up by Mr. Pisani had the serial number ZJ6752 which did not appear on the most recent bar list at that time. It was later discovered that this "GLD" bar was actually owned by ETF Securities."