Biggest Myths About Investing In The Stock Market

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Between business news sites, personal finance blogs, podcasts, fintech apps, and social media, we are constantly inundated with information and opinions that shape how we think about our money – and most importantly, how we use it.

One piece of advice we often come across is to put our money in the stock market, but the reality is that such a move can be intimidating. We know investing can help us build wealth over the long term, but there are risks associated with it. Not to mention that in everything we hear and read, it is difficult to decipher what is true and what is not about the markets.

To help you out, Select spoke to two investment gurus about the common misconceptions in the market they hear so we can dispel the myths and make sure your money is working for you.

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Myth 1: Investing in the stock market is like gambling

On the surface, it is easy to see how people relate investing in the market to gambling. The latest meme stock trend has shown how quickly investors can accumulate (and lose) insane wealth overnight. In fact, Erin Lowry, author of Broke Millennial Talks Money and Broke Millennial Takes On Investing, has admitted that investing can be more like gambling just for the thrill of it.

There are some similarities between the two, admits Jeff Tsai, co-founder of JAVLIN Invest, a new app that helps investors gauge the volatility of the stocks they hold in their portfolio.

“Either way, you risk capital without being sure you will get a return,” said Tsai. “But perhaps the biggest difference between investing and gambling is that, in the long run, time is in favor of the investor, while time in gambling is in favor of the casino.”

Patrick McGinnis, CFA, CFP and partner at wealth management firm Moneta Group, agrees that investing is a long-term game that most likely benefits the investor from holding out over time.

“When you gamble, someone wins and someone else loses,” says McGinnis. “Investing means making a profit, and that profit is distributed to shareholders, making it a long-term way to achieve wealth versus short-term speculation.”

And when investing, it’s not a bad idea to have someone guide you. A financial advisor can help you find long-term investments to add to your portfolios so you avoid the unnecessary risk of jumping on the hottest meme stock of the day.

Myth 2: You can time the market

Despite what many veteran investors or TikTok stock traders may try to tell you, no one really knows what the market is going to do.

“Timing the market is incredibly difficult because there are actually two decisions to be made: when to get out and when to buy again,” says McGinnis.

Take the early days of Covid, he says, when investors wanted to pull out of the market amid the financial chaos, claiming they would get back in when things got better. “[But] Selling low and buying high is not a way of making money in the market. “

Rather than trying to time the market, the best route to long-term investment success is to stay on course. Avoid getting caught up in the daily news cycle and let your initial investment strategy play out.

Myth 3: The more stocks you own, the more diversified your portfolio will be

“That’s true to some extent, but the key is how uncorrelated the stocks are,” says Tsai. In other words, how differently do stocks react to certain market conditions?

Correlated stocks tend to move up and down together, while uncorrelated stocks tend to move in opposite directions. For example, a portfolio made up of all of the high-growth tech stocks wouldn’t be very diversified as they would likely all move in parallel, explains Tsai. This can increase your profit potential in a technology favorable economic environment, but it also increases your risk since all of your eggs are in one basket.

The key to having a diversified portfolio – which any financial planner will recommend – is to spread your money across multiple asset classes (stocks, bonds, real estate, etc.) so that you have more money-making opportunities in almost all circumstances.

Myth 4: percentage gains and percentage losses are equivalent

Understanding the percentage gains and losses over time is important for investors as it helps them determine their return or net gain or loss over a period of time. The challenge is to think that they are equivalent in math.

Tsai provides an example: Say that yesterday you were down 10%, but you are up 10% today. You may think that you are back where you were two days ago, but that is not correct. If you started with $ 100 two days ago, lost 20% (or $ 20) yesterday, and gained 20% today, you only have $ 96: losing 20% ​​of $ 100 means you have $ 80, but one Profit of 20% on $ 80 is $ 16 which brings you to $ 96.

In fact, it would have taken you 25% profit to get back to $ 100: 25% of $ 80 is $ 20. What does Tsai want investors to be on the alert for? “Our minds can easily trick us,” he says.

Myth 5: Investing is for the rich

While investing money on the stock market used to be reserved for those who had a sufficiently large amount and the ability to hire an expert to guide them, this is no longer the case.

Nowadays, thanks to the advent of commission-free online brokers and robo-advisors, anyone can trade with just a small amount of money (or really with investment knowledge). Robo-advisors are essentially software that uses algorithms and data to invest on your behalf, according to your investment goals, time horizon and risk tolerance.

The premium robo-advisor Betterment has no minimum requirements for investors, and the annual account fee is a low 0.25% of your fund balance. So if you’ve invested $ 5,000 at Betterment, you’ll only pay $ 12.50 per year.

Female investors in particular should consider robo-advisors Ellevest. Its platform algorithm takes into account important realities of women’s lives, such as wage differentials, career breaks, and longer life expectancy, so women can get a real sense of where they are financially. Ellevest offers three different membership levels, ranging from $ 12 to $ 97 per year.

Bottom line

While all we read or hear about personal finance is certainly not true, there is one consistent message that we all agree on: Investing our money can help us build real wealth.

The next time you come across any of the above five myths about the stock market, you’ll know how true those statements really are and you can adjust your plans accordingly.

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Note to editors: Opinions, analysis, reviews or recommendations expressed in this article are those of the Select editorial team and have not been reviewed, approved or otherwise endorsed by third parties.