Investing can be a great way to help you reach your financial goals – whether it’s saving for your kids’ education or building wealth.
But a few myths about investing are so persistent that some people may still feel hesitant about getting started – despite the fact that there are more investment opportunities and resources at our fingertips than 10 or 20 years ago.
So what are some of the misconceptions? Two common ones are: Investing is too complicated to figure out and it’s too risky. To be sure, investing does involve risk. But there are also risks in not investing, and skipping out could impact your potential to achieve certain financial goals, like living out the retirement you’ve always dreamed of.
Ahead, we’ll go over four big investing myths that have stuck around over the years and see if we can help dispel them once and for all.
We can understand why this myth has staying power. Investing wasn’t always available to everyone. In the past, you’d typically have to pay a broker to execute trades for you, and not everyone could afford the commissions and fees. So it’s easy to think that investing is only for the ultra-wealthy.
But the reality is almost anyone can start investing these days. Just take a look at how many online investment platforms have cropped up in recent years with the goal of helping everyday investors get into the market. There are many investment firms that can set up and manage a portfolio for you with low minimum balance requirements and low fees.
Good to know: While you don’t need to have a lot of money to start investing, it’s a good idea to make sure your savings (think: emergency fund) are in order first. That way if unexpected expenses come up, you can cover them without having to pull money out of your investment account. When it comes to investing, the longer you’re able to stay invested in accordance with your investment plan, the better chance you’ll have of reaching your goals.
Investing can seem daunting, especially to newcomers, given that there are so many different types of investments to consider and also all the industry jargons you may encounter.
But here’s the thing: Investing can be as complicated or as simple as you want it to be. In other words, it doesn’t have to be complicated. It all depends on your investment style (see Active vs. Passive Investing).
For instance, if you’re new to investing or simply prefer a more hands-off approach, you could choose to “automate” your investing. This is where a digital investment platform or robo-advisor can help you put together and manage a diversified portfolio – after you provide some basic information about yourself, your investment goals, and risk tolerance. With automated investing, you usually don’t have to worry about picking the “right” stocks or funds and building a portfolio from scratch.
On the flip side, more experienced investors can choose to build and manage a portfolio by personally handpicking stocks, bonds, and other securities. This approach can take more time because it usually means you have to handle certain investment tasks on your own, which may include things like market research, asset allocation strategy, and portfolio rebalancing.
Good to know: It’s a good idea to familiarize yourself with some investing basics before you open an account. Knowing the fundamentals of investing can help you make informed decisions about your money and build confidence as an investor. Check out Marcus Resources for investing explainers that could help you get up to speed.
Some people may feel investing is not worth the risk. After all, there’s no guarantee you’ll make money – and you could even lose your original investment. While it’s true investing involves risk, historically, over long periods, financial markets have generated higher returns than interest earned from a savings account.
Plus, there are ways to strategically manage risk. For instance, you may already be familiar with the concept of diversification. This is a strategy where you divide up your money across different investments (like stocks and bonds) to help spread out your investment risk.
The basic idea is that if a certain class of assets isn’t doing well, other assets in your portfolio might be able to help offset the losses with gains. And that’s because different investments carry different degrees of risk (for example, bonds are generally considered less risky than stocks).
Keep in mind, however, that diversification doesn’t guarantee a profit nor can it protect against loss. A key to investing is knowing how much risk you’re willing and able to take on. Understanding your risk tolerance (as well as time horizon) can help you choose an investment strategy that best fits you and your goals.
Bottom line: When you invest, there’s a potential for losses, but there’s also the possibility for gains. While day-to-day volatility can be unsettling, remember that periods of market fluctuations are normal and expected.
When you put money away in a savings account at a FDIC-insured bank, that money is generally considered “safe” because there’s a low risk of losing your deposits, which are insured up to a certain dollar amount (currently $250,000 per depositor, per insured bank, for each account ownership category).
This may lead some people to think that saving is better than investing. But saving your money instead of investing it is not entirely risk-free. Think of it this way: While your money may earn interest in a bank account, inflation can gradually erode the value of your savings. In other words, the interest you earn in a savings account may not be able to help you keep up with inflation (aka, inflation risk).
Investing offers an opportunity for you to potentially earn a better return than what you could get through a savings account, helping to protect the value of your money as the cost of living increases over time.
Good to know: Saving and investing is not an “either-or” consideration. Both can help you reach your financial goals. The key is finding the right balance between how much to save and how much to invest after you’ve hit your savings goals.
Consider working with a financial advisor if you need help crunching the numbers and putting together a strategy.
Read more: Saving vs. Investing
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