Investing has been heralded as an important thing. From wealthy nations to wealthy individuals they all attribute some if not all of their wealth to investing. Yet for something that is this useful, there are still some myths and inaccuracies that are held as truths about investing. Some are just a result of a misunderstanding while others are complete falsehoods that people have come to believe. So let’s look at 5 prominent investing myths and let’s debunk them.
You need a lot of money
Everybody has been taught to think of investors as big fish. While there are certainly many investors who have become huge fish, whales actually, many of them did not start big. In fact, the game of investing isn’t about what you started with but rather what you make in investing. Does investing bigger amounts bring more favour? Absolutely. However, this means there is space for small amounts in investing. If for example, you invested ZWL$1 000 a month for 5 years you would not have ZWL$60 000 but more if you apply growth and compounding to your investments. How much more? That depends on the rate of return you can achieve but double or triple isn’t unreasonable. Most big investment portfolios are built up with consistent small amounts over time.
High risk, high return
I cringe every time I see people say this because it is a hugely misunderstood statement. Many use it to highlight that if you take on more risk you get higher returns. If you take lower risks, expect lower returns. And while it initially seems to make sense consider a stock market investor. Does the market care how much risk you are taking on? Nobody will ever ask you how much risk you feel a company is to invest in. This statement actually comes from the world of investment banking and financial institutions that are dealing with large investment sums. Because of their size and position as early investors they can demand a certain level of return and generally factor the level of risk into this. They get paid according to the level of risk they take but retail investors don’t. For us, the risk is the risk and the return is the return.
Diversifying improves your returns
Diversifying is the act of spreading out your investments. This is really a risk management strategy rather than a return maximisation strategy. Diversifying is an attempt, that is not always successful, to preserve invested funds by spreading the investment across various products and investments. Here’s the thing that proponents of diversification don’t tell you and I will use the stock market to make this example. If you can pick one bad company to invest in chances are very high that your second choice will also be a bad pick. Diversifying in itself does not help you choose good investments, it’s no substitute for doing the research and picking good investments.
Investing is gambling
This makes a good follow up to the previous point. Investing is gambling only if you treat it as such. What I mean by this is if your investment approach is random and haphazard your results in investing will be random and haphazard if not downright disastrous. Even in other recognised forms of gambling, there are analysis methods that can be used to increase the chances of success. Those who view investing as gambling are simply speaking to their mindset and not the markets. What can you do to make sure you’re not gambling? Do the work and the research. In investing you win when you buy right and you must do the work to make sure you understand your investments.
Past Performance Guarantees Future Returns
This one is hard to argue because there are so many facets to it. However, the fact is people tend to believe that the past performance of an investment will equal its future performance. If you ask anyone who had the value of their investments wiped out in 2008 or 2018 you will understand where this myth gets it wrong a little bit more. Investments are impacted by a multiplicity of factors that include time horizon, ease of entry, liquidity, ease of exit and risk profile among others. High returns that cannot be accessed are not worth it. The past is a great indicator of what has happened and provides some clues as to what to expect but investments must also be assessed with an eye to matters of the future and what can affect it. 2008 and 2018 were foreseeable to different degrees at different stages in the progression towards them. Some things could’ve been done to protect investments.
Which of these myths have you held on to? Any myths that you know that could be included here?