- Believing in these common financial myths can have a negative impact on your money.
- What may have been true decades ago may no longer be true due to technology and economics.
- While rules of thumb can be helpful, they are no substitute for personalized financial advice.
- Read more stories from Personal Finance Insider.
For decades, investing has long been known as a confusing business, mostly reserved for the wealthy and far too complex for the average individual. But these notions quickly began to fade with the exponential increase in the number of
and influencers who have made investing both more accessible and more relevant.
Even with these changes in the financial landscape, some costly myths still exist.
Myth #1: Investing is only for the rich
The phrase “it takes money to make money” is one of the reasons this myth is still so prevalent today. While it’s technically true that you need at least some capital to invest, it no longer requires thousands of dollars like it used to. “People hear ‘invest’ and immediately think of stock picking and day-trading, or investing millions,” says Elizabeth Pennington, CFP® professional at Fearless Finance, a financial planning app owned by Atwood Financial Planning. “But anyone who has contributed even $20 to their retirement account is already investing.”
Investment firms were once notorious for requiring clients to have $5,000 to $250,000 to meet with a financial advisor. On top of that, if you were looking to buy a stock, that would mean buying a whole stock which the company says could be hundreds, sometimes thousands of dollars for a single stock.
This is no longer the case, as fees and minimums for investment services have dropped significantly over the years. Many brokerages now offer fractional shares, allowing investors to spend as little as $5 to invest in a stock of their choice, allowing you to participate in the same percentage gains as someone with more to invest.
Myth #2: Keeping your money in cash is safer than the stock market
In times of market volatility, it may seem safer to leave your money in a savings account. This is a common reaction to avoid having an investment account balance erode rapidly due to a market event. Although the face value of your savings does not experience a sudden drop in value (unless you make a withdrawal), you can lose purchasing power due to inflation.
For example, $100 in 2001 would have been worth about $63 in 2021. During the same period, if the same $100 had been invested in the S&P 500, it would have been about $534 in 2021. In economics, we speaks of opportunity cost, because not investing the money would have cost $295 in this situation.
“If your money is all in cash in a low interest bank account, you risk inflation overshooting interest rates. By investing it, that money works harder for you and has the potential to grow. over time,” says Kelly Lanansenior vice president of emerging clients at Fidelity Investments.
Myth #3: All your debts must be paid off before you start investing
The debate between paying off your debt and investing is one of the hottest topics in personal finance, after owning a home versus renting. “That’s most definitely wrong,” says Pennington. “Telling them to wait to invest until the debt is gone could seriously jeopardize their future financial security,” she adds.
One of the reasons this question comes up so often is the burden of student loans and how they have stretched the budgets of millions of Americans. With limited funds, every decision is amplified: focusing on paying off debt can provide a debt-free lifestyle with more free cash flow, while investing can boost your overall net worth and help secure you a comfortable retirement.
The type of debt you may be considering paying off and the amount of that debt is absolutely important when considering this topic. But it is also important to consider the opportunity cost. For example, if it takes 10 years to pay off your student loan, you’ve also missed 10 years of compound growth, making it much more difficult to reach your retirement goals.
Myth #4: The stock market only goes up
Overconfidence about past stock market performance can be misleading. This is why one of the most common expressions in the investment world is that past results do not predict future returns. Investors in the once-popular ARK Innovation ETF (ARKK) led by Cathie Wood learned that fact quite abruptly.
In 2020, the fund gained more than 150%. But in 2021, it reversed, losing almost 32%. While it is true that the stock market wins more often than it loses, that does not indicate that the market is going up all the time, especially in the short term. From the year 2000 to 2019, a correction occurred 11 out of 20 years – or 55% of the time according to Schwab Center for Financial Research.
Myth #5: Investing is like gambling
By definition, investing is the act of using one’s money for the purpose of obtaining financial gain. At first glance, it might look a lot like gambling, especially since both involve a certain level of risk and winnings are not guaranteed. However, looking deeper, there are several key differences between the two.
The investment is designed to be mutually beneficial for the investor and the company. This is because the company uses the public markets to grow its business and this growth can help increase the wealth of the investor. When the company is doing well, the investor is doing well. The game is the opposite where each part is on opposite slides; the casino only wins if you lose and vice versa.
put it all together
When it comes to your finances, a rule of thumb can be a simple and effective tool to help point you in the right direction, but it’s important to remember that it doesn’t replace individual situations. For more personalized answers to your financial questions, consider hiring a professional.
“I want people to know that they don’t have to be rich to access professional financial advice. Finding a paid hourly planner can be a great way to get questions answered without worrying. worry about getting something sold,” says Pennington. .