A couple of weeks ago, I published an article that debunks four myths about investing. Safe to say that there are more investing myths out there that need to be put to the test. Many people have a surface-level understanding of investing. The reason they do not possess in-depth knowledge about investing is partly due to myths and misinformation surrounding it. I am sure that many parents advise their children to keep their money in the bank or convince them that real estate is the best investment vehicle out there. These are just a few of the investing myths that plague the minds of today’s generation.
One of the missions of Living Through Twenties is to encourage financial education and improve financial literacy among twentysomethings. Hence, let us go through some more investing myths and separate fact from fiction.
1. One must have excellent credit before investing.
When I started investing more than a year ago, I am required to present my credit report to my brokerage account, and that says something: no financial planner, online brokerage account or robo-advisor will ask you for a credit report to determine whether you are qualified enough to invest. That being said, you do not need a high credit score to start investing. I firmly believe that everyone has the right to invest without hassle, and it is up to the investor him- or herself to decide whether or not it is a wise idea to start investing now.
Having said that, view your credit score as your financial health scorecard. A low score could indicate that you have more spend more than you are earning or are unable to make timely payments. If you have a high debt-to-credit ratio and are struggling with debt management, put the idea of investing right now aside first. Devoting your time and resources to improve your credit score is one investment that keeps on giving dividends.
2. You do not need to sweat about your financial future if you invest.
You can spend every night analysing the financial statements of firms you want to invest in, or you can keep your hands clean by putting your money in the hands of a robo-advisor. The message here is that you get to decide for yourself how involved you want to be when it comes to investing. Typically, a set-it-and-forget-it tactic can be optimal with a robo-advisor that will make automatic portfolio adjustments depending on your degree of risk tolerance and overall market sentiment.
With that in mind, just because you have an ample amount of money in an investment account does not mean your financial future is safeguarded. The market behaves erratically, and the rate of return may not be what you initially expected.
“Financial freedom is available to those who learn about it and work for it.”Robert Kiyosaki
You will still need to devise a blueprint for your financial future, including planning for retirement, saving goals, budget adjustments, income fluctuations and emergency funds. If you are struggling to formulate a plan to guarantee your financial future, consult with several personal financial advisors. The more professional opinions you have on hand, the better you are at making well-informed decisions regarding your future financial outlook.
3. Investing is the same for everybody.
Just because your friend can rack in huge profits due to his or her investing strategy does not mean the same strategy works well for you. Your financial situation will most likely be different from your friend’s, and hence, you will have your own set of financial goals. That being said, your investment strategy will not be identical to anyone else’s.
To determine how you want your investment strategy to be, consult with an investment consultant and educate yourself on the investing fundamentals. Formulate your strategy around your financial goals – not your friend’s.
4. Investing is only possible if you have ample time to let your pool of money grow.
Yes, the more time you have, the more money you will eventually have. So, you can thank the effects of compounding.
“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”Robert G. Allen
Supposed you invest $5,000 in an online brokerage account today and contribute the same amount annually. Assuming 7% is the average growth rate, you would have an end balance of around $500,000 in 30 years. In contrast, you only have a total of $150,000 if you kept all your money in the bank.
So, there you go; the greater your time advantage, the more money you will end up with. However, do not let that discourage you from even investing for a decade. You would rather have growth in your pool of money than no growth at all.
5. All types of investing are identical to each other.
This myth is straightway busted. For example, bonds are more appropriate than stocks for risk-averse investors. However, investors who want to seek higher returns may invest in stocks. The takeaway here is that all investing types differ from each other because of the level of risk associated with each investment vehicle.
Speaking of investment vehicle, many are convinced that…
6. Real estate is an excellent investment.
This may be an unpopular opinion: real estate has no guaranteed returns. Given the stock market’s history, you are better off making more money through stocks than properties. In addition, when you invest in real estate, you have to deal with additional costs such as property taxes, maintenance fees, insurance fees, etc. All of these costs can eventually erode the value of the property.
There is nothing wrong with owning a home. I think for everyone, that is the symbol that informs everyone around you that you have made it in life. If that is your life’s mission, by all means, chase after it but only if it is financially doable. A house is not an investment but an asset with liabilities. This is because instead of putting money in your pocket, the house takes money out of your pocket periodically. So, if you believe that owning a house is an investment, you are just setting yourself up for disappointment.
“Not all real estate investments are profitable.”
Once again, I am not asserting that you would not be able to make reasonable returns from the property you invested in. On the contrary, if the circumstances are right, you can earn money off of real estate. However, based on my understanding, I advise you to keep a realistic mindset and mentally prepare yourself before jumping on the bandwagon.
7. Past performance is indicative of future results.
It is easy to invest in a stock that provides both steady capital gains and dividends. Perhaps someone told you that you could never go wrong with investing your money in Apple stocks. However, just because Apple shares have done tremendously well in the past does not mean you can expect the same performance in the future.
Lots of people may be enthusiastic about investing in Tesla stock because of what they heard about the company’s future potential. However, it could be a bubble. These so-called investors are looking to get rich quickly and treat the stock market as a casino. If you are serious about investing, you should stay away from investment hypes and stick to the words of your investment consultant. Alternatively, if you want to keep things hassle-free, let your robo-advisor do the dirty work for you.
Final 2¢: Tackle investing myths with financial education and literacy.
The seven investing myths outlined above stem from the fact that many people do not give themselves the time to question their financial decisions. And this is partly due to the schools’ failure to implant a good financial mindset among students and teach them the importance of long-term wealth management.
The reality is that investing is not risky. Unfortunately, most of us see it otherwise because we are risk-averse creatures. When we do not understand a particular subject, we revert to our natural instinct, which is to stay away from it for our safety’s sake. If we are a good understanding of all the financial tools available to us, chances are, humanity is in a much better financial place. Hence, it is up to us to seek our own financial education.