While it might be easy to fall into the habit of believing investing is all about luck and good timing, it pays to realise there is much more to it than that.
It may seem as though the world of finance is a cut and dry matter, however, conflicting thoughts often lead to varying opinions. However, sometimes these opinions are not entirely based on data or fact, which gives rise to a number of common misconceptions that deter individuals from investing in the stock market.
In fact, some of these misconceptions are quite frankly myths. With that, it goes that some of these myths have the potential to cause issues when it comes to your pursuit of financial freedom. Let’s take a look at three of the most-common myths about investing.
Investing is the same as gambling
RIght from the get-go, we thought we’d tackle this one first. While an element of speculation can come into consideration from time to time when investing, to describe it as being similar, let alone the same as gambling, is doing a disservice to investors who are proactive about building their wealth.
When it comes to commonalities, sure, investing does come with risk and you do run the risk of losing some or all of your money. But there are inherent differences in the approach to both activities, with investing all about trying to find risk-appropriate opportunities that deliver acceptable returns. On the other hand, gambling is very much risk-centred, with disproportionate returns based on significantly higher levels of risk.
For the everyday investor, the stock market is a means with which one can gain exposure to and invest in companies with established operations that bring in money, or stand to enter commercialisation or growth stages of the corporate life cycle. Remember that with every investment you gain ownership of a tangible asset, often a stake in a company. Gambling does not provide you with any control over assets unless you win and lay claim to those assets as a prize.
With this in mind, investors typically gravitate towards outcomes that offer greater levels of certainty and predictability, and shy away from conditions that are unpredictable or where uncertainty is prominent. Essentially, investors place more focus on the reliability and certainty of returns on their investment, whereas a punter is more concerned with the magnitude of how much they might win, even if the bet is unlikely to pay off.
The outcomes for investors in the stock market are much more diverse in nature, as their investments are typically tracked over a period of time, rather than one single event. In this sense, gambling is more of a binary outcome, meaning you are set to either win or lose depending on a series of specific events - sometimes, just one.
There is no need to start investing early in life
If you’re a familiar reader of our blog, you’d know by now why the above statement is a complete myth. Actually, we’d probably even go as far as to categorise this one as a misleading lie, and one that could definitely cost you or someone you might know in the long-run.
For starters, the number one factor that plays into the hands of investors is time. That is, if you want to see your investments deliver ongoing returns that help you generate wealth, time is your best friend. It means the earlier you decide to begin your investment journey, the more you stand to gain. Not only financially, but even from an education perspective, as those lessons in the early years of your investing experience can prove invaluable.
Now, why does it pay to start investing from a younger age? That all comes down to the effects of compounding growth, which is a tailwind as far as returns go. As you generate returns over the years, including capital growth, dividends and interest, which each build up the value of your investment portfolio, this can snowball and help you grow your assets. With all else being equal, including your rate of return, assets that grow from a higher starting position will compound to larger values over the long-term.
What does this all mean? If you haven’t already made your entry into the investment realm by now, don’t delay. If you have the potential to influence and shape the investment journey of a young one, be it a son or daughter, or family relative, encourage them to capitalise upon their most valuable asset - time!
Timing the market is the best approach to investing
For traders, timing the market may well be an effective approach, albeit one that comes with substantial risk. But for typical investors, this is unlikely to be the case at all - unless of course, you happen to be an oracle with impeccable foresight and judgement. This point flows on from our last one, emphasising the notion that time in the market really is your best friend.
Rather than being fixated on trying to time every movement in the market, it often pays to remain invested in the stock market. The difficulty that comes with instead trying to time the market is something that should be left to the professionals. Even then, it’s no surprise a number of fund managers struggle to outperform the benchmark stock indexes, because they too witness the difficulties, or should we say impossibility of trying to time every trade in an effort to maximise profits.
Investors would be wise to take a long-term approach to investing to ensure they retain exposure to the stock market, which typically trends higher over the long-term. Trying to time the market is fraught with risk, both in terms of selling too soon, or buying too late. If anything, this is more contingent on luck than anything, and leaving your investment journey down to luck is never a reliable strategy.
What’s more, data also shows that over time, investors who see the highest returns are typically those with a buy-and-forget strategy, and those who remain invested during the stock market’s biggest days. There are good reasons why the likes of Warren Buffett advocate for this strategy, while very few investment professionals suggest you should try to time the market.
If there is a take away after familiarising yourself and busting these myths, it is the importance of sourcing reliable information about investing. Some may liken investing to gambling, however, parallels should not be drawn between the two. It’s also valuable to realise that time in the market, especially when it comes to starting your investment journey, is your best asset when trying to build wealth. All told, having access to the right guidance can really make a difference as you navigate through your journey.