Table of Contents
- Myth 1: I need to have a lot of money to start investing
- Myths 2: Past performance guarantees future returns
- Myths 3: Investing is gambling
- Myths 4: Investing means stocks picking
- Myths 5: Investing requires a lot of time and need to time the market right
- Myths 6: Diversification is the best way to reduce risk
- Myths 7: Low fees are important when it comes to choosing an investment.
Myth 1: I need to have a lot of money to start investing
You can start investing as little as $1. You do not have to have a lot of money to participate in the wins of companies. In the past, due to limited accessibility and high entry barrier, people need to put down some amount to buy shares. But now, with the technology and mobile devices, anyone can download apps such as Interactive Brokers or Trading212 to start investing with a little as $1. What is even better, if you register Trading212 using this link, and/or use code FMXbdHfC after depositing some money, you will receive a free share. Voila, without even trading yourself, you own a share. You started investing!
Myths 2: Past performance guarantees future returns
In every single promotional material of financial products, it stated past performance does not guarantee future returns. What happened in the past is IN THE PAST. Anything can happen in the future, such as a global pandemic. You should not take past performance as the projection for future performance. You can do your own research and predict the growth trend of the company or industry and it is a prediction, not a fact until it happens. So don’t be disappointed if your investment return is not the same as it was in the past.
Myths 3: Investing is gambling
Investing is put (money) into financial schemes, shares, property, or a commercial venture with the expectation of achieving a profit.
Gambling is play games of chance for money, take risky actions in the hope of a desired result.
The difference between investing is gambling is that you can make an educated decision by investing in value appreciating assets such as real estate or stocks. Based on many factors and information, you expect those assets will appreciate in value. On the other hand, gambling is a game of luck. You can not preengage the result.
Myths 4: Investing means stocks picking
Investing does not mean you have to pick individual stocks. Even though that is what most people think of – stocks picking. You can invest in ETFs, mutual funds, bonds, gold, yourself … There are so many types of assets. If you don’t know how to pick stocks, let the professionals do that, or let the market do it by buying ETFs.
Active fund managers failed to beat the market again in 2020. If those professionals can not beat the market, how can you?
Myths 5: Investing requires a lot of time and need to time the market right
As you have known now, fund managers can not beat the market by picking stocks, no matter how much time you spend on investing, you will most likely not beat the market either. Therefore, the best strategy is to buy the market. How? You can invest in passively managed ETFs so that your investment is diversified and you don’t have to manage it as it is tracking an index. You can buy portfolios of stocks this way and leave it to grow by itself. Especially using the dollar-cost averaging method, you reduce risks from market volatilities.
Time in the market is more important than timing the market!
It is not about buying low and selling high, because human nature will prevent you from doing the right things and you will most likely do the opposite. It is proven, don’t test yourself.
Myths 6: Diversification is the best way to reduce risk
Diversification is needed when you want to reduce risk, too much diversification will turn into diworsification as Matthias mentioned in the Live session. When you have multiple investments, and in each fund or ETF there are duplications, it is not helping you.
Even Warren Buffet has said: “ Put all your eggs in one basket and watch that basket.” So diversification is not the best way to reduce risks when you overdo it. Do it smartly.
Myths 7: Low fees are important when it comes to choosing an investment.
Fees are reducing your investment return. No doubt on that. If you emphasize too much on the fees, you might lose sight of the big picture. A 20% return on real estate investment will turn into a 15% net ROI after a 5% transaction fee. An ETF will give you a 9% return after deducting 0.3% expenses. A 5% fee investment is giving you 15% net ROI vs. a 0.3% fee investment is giving you a 9% ROI. Low fees are not the most important factor in investing.
There are so many investing myths out there. We also received some questions in the live chat session. Watch the video replay to see what are other myths that we have addressed.
If you want to learn more about how to manage your money, start investing and improve your personal finance, be sure to subscribe to Fast Track YouTube Channel and join the money talk with us every Wednesday.
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