With the nearly limitless amount of educational information available today, there’s never been a better time to learn about investing. Unfortunately, there’s plenty of misinformation to go along with all the useful resources.
The stock market can be extremely complicated, and not everyone who blogs or posts info about investing has taken the time to provide an accurate information. Even now, there are still stock market myths and misconceptions that investors believe to be true. Let’s look at 7 of the most popular investing myths.
- Stocks are riskier than bonds
It’s understandable that investors would believe this myth because the stock market is so volatile on a month-to-month or year-to-year basis. However, on a longer-term time horizon, the U.S. stock market for example, has been remarkably consistent. Since 1926, the rolling 30-year average annual return of the S&P 500 index has stayed between 8 to 15% nearly the entire time. While investment-grade bonds can be extremely low risk, so can a diversified portfolio of a high-quality blue-chip stocks or a low-cost S&P 500 index fund, such as the Vanguard 500 Index Fund.
- Buying stocks is like gambling
Once again, people believe that stocks are riskier than they really are because they are thinking in the short term. If investors treat the stock market like a casino by making short-term, highly concentrated bets on high-risk stocks, they will likely experience the same type of terrible returns that the typical casino gamblers could expect. However, by selecting a diversified fund or basket of blue chip stocks, historical data suggest investors can expect annual returns of greater than 8% in the long term. There’s no casino in the world that can provide that kind of long-term payoff.
- Investing requires a lot of money
It’s easy to look at $5,000 in savings and think that buying stocks is not worth the effort. After all, an 8% return in $5,000 is only $400, which won’t go very far in paying for retirement. While it’s true that investors won’t become rich overnight by investing $5,000 in a diversified portfolio of stocks, the power of the stock market rests in compounding returns. If a person starts investing $5,000 per year in the stock market and gets an 8% annual return, that portfolio would be worth more than $500,000 within 30 years.
- Past performance guarantees future returns
An investment’s past performance on a long enough time frame can be an important indicator of what to expect in the future. But assuming that a stock, bond and commodity will continue its past trajectory in the years ahead can be a risky way of thinking. Traders that attempt to chase the hottest stocks often end up getting burned when those stocks experience short-term regression. Rather than trying to guess where a stock is headed in the short term by looking at the past, investors should choose quality, long term investments and remain patient through the short-term market noise.
- Fund management fees are too small to matter
Mutual fund fees and Index fund fees may seem so small that they don’t matter, but a closer look at the numbers shows just how much difference just 1% can make. The average mutual fund investor is subject to annual expense ratio fees of 1.19%, hidden costs fees of 1.44%, tax inefficiency costs of 1.1% and “sneaky behaviour” costs of 2.49% according to Forbes. At an 8% annual return, a $100,000 investment can grow up to $1, 006, 266 in just 30 years. However, losing just 1% annually can drop the balance to $761,266.
- Gold is the best investment
While gold provides protection against inflation, unfortunately, there’s little evidence to suggest it is a better long-term investment than buying stocks. From 1996 to 2015, gold generated an average annual return of 5.2%, well below the average annual historical return of the S&P 500. From 1970 to 2015, gold averaged a 7.9% annual return, roughly in line with the low end of the stock market’s historical range. While paper money may have no intrinsic value, gold doesn’t either. Like any other asset, gold is only worth what investors are willing to pay for it.
- Popular companies always make good stocks
Just because a company has a recognizable brand, or a popular product doesn’t mean the company’s stock will be a good investment. The market reacts to a number of different valuation metrics other than brand popularity. Investors value stocks based on share structure, earnings and revenue growth, company debt levels, subscriber counts, same-store sales and countless other industry-specific numbers. For example, Facebook (FB) and Twitter (TWTR) are two of the most popular and successful social media brands in history. However, in the past three years, Facebook shares are up 138%, while Twitter stocks are down 45%.
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