With the help of two investing gurus, Select debunks some common misconceptions about the market.
Between business news sites, personal finance blogs, podcasts, fintech apps and social media, we are constantly inundated with information and opinions that shape the way we feel about our money — and, importantly, how we use it. One piece of advice we often come across is to put our money in the stock market, but the reality is that making such a move can be intimidating. We know that investing can help us build wealth over the long term, yet there is risk involved. Not to mention, it’s hard to decipher what’s true and what’s not about the markets from everything we hear and read. To help out, Select spoke with two investing gurus about the common market misconceptions they hear, so we can dispel the myths and make sure your money is working for you.
Myth 1: Investing in the stock market is like gambling
On the surface, it’s easy to see how people would relate investing in the market to gambling. The latest meme stock trend has shown how quickly investors can amass (and lose) crazy wealth overnight. Erin Lowry, author of “Broke Millennial Talks Money” and “Broke Millennial Takes On Investing,” has even acknowledged that investing just for the thrill of it can be more akin to gambling. There are some similarities between the two, admits Jeff Tsai, co-founder of JAVLIN Invest, a new app that helps investors gauge the volatility of the stocks they hold in their portfolio. “Both involve risking capital without knowing for certain if you’ll get a return,” Tsai explains. “But perhaps the biggest difference between investing and gambling is that over the long run, time is in favor of the investor whereas with gambling, time would be in favor of the casino.” Patrick McGinnis, a CFA, CFP and partner at wealth management firm Moneta Group, agrees that investing is a long-term game where the investor most likely benefits from sticking it out over time. “In gambling, somebody wins and another person loses,” McGinnis says. “Investing is to make a profit, and that profit is distributed to shareholders, making it a long-term way of gaining wealth versus short-term speculation.” And with investing, it’s not a bad idea to have someone guide you along the way. A financial advisor can help you find long-term investments for your portfolios so you can avoid undue risk of hopping on whatever is the hot meme stock of the day.
Myth 2: You can time the market
Despite what many veteran investors or TikTok stock traders may try to tell you, nobody actually knows what the market is going to do. “Timing the market is incredibly difficult, as it’s actually two decisions to be made: when to get out and when to buy back in,” McGinnis says. Take the early days of Covid, he says, when investors were looking to pull out of the market amid the financial chaos, claiming that they would get back in when things got better. ”[But] selling low and buying high is not a way to make money in the market.” Instead of trying to time the market, the best route for long-term investing success is to stay the course. Avoid getting wrapped up in the day-to-day news cycle and let your initial investment strategy play out.
Myth 3: The more stocks you own, the more diversified your portfolio will be
“This is true to a certain extent, but the key is in how uncorrelated the stocks are to each other,” Tsai says. In other words, how differently do the stocks react to certain market conditions? Correlated stocks tend to move up and down together, while uncorrelated stocks tend to move in opposite directions. A portfolio of all high-growth tech stocks, for example, wouldn’t be very diversified because they would likely all move in tandem with each other, Tsai explains. This may help your profit potential in the case of economic environments favoring tech, but it also increases your risk since all your eggs are in one basket. The key to having a diversified portfolio — which, hey, every financial planner will recommend — is to spread out your money across multiple asset classes (stocks, bonds, real estate, etc.) so you have more opportunities to make money in almost any environment.
Myth 4: Percentage gains and percentage losses are equivalent
Understanding percentage gains and losses over time is important to investors because it helps them determine their rate of return, or their net gain or loss over a certain time period. The challenge is thinking that they are equivalent when you do the math. Tsai provides an example: Say that you were down 10% yesterday, but you are up 10% today. You may think you are now back to where you were two days ago, but this isn’t correct. If you started with $100 two days ago, lose 20% (or $20) yesterday, and then gain 20% today, you only have $96: losing 20% of $100 means you are left with $80, but a 20% gain on $80 is $16, which brings you to $96. In fact, you would have needed a 25% gain to get back to $100: 25% of $80 is $20. What Tsai wants investors to be wary of? “Our minds can easily trick us,” he says.
Myth 5: Investing is for the rich
While investing money in the stock market used to be reserved for those who had a large enough sum to invest and the means to hire an expert to guide them, it’s no longer the case. Nowadays, thanks to the emergence of zero-commission online brokers and robo-advisors, anyone can trade with just a small amount of money (or investing knowledge, really). Robo-advisors are essentially software that use algorithms and data to invest on your behalf, according to your investing goals, time horizon and risk tolerance. Top-rated robo-advisor Betterment has no minimums that investors need to meet, and the annual account fee is a low 0.25% of your fund balance. So, if you have $5,000 invested with Betterment, you’ll pay just $12.50 each year. Women investors, particularly, may want to consider robo-advisor Ellevest. Its platform algorithm considers important realities of women’s lives, such as pay gaps, career breaks and longer life expectancy, so women can get a true sense of where they stand financially. Ellevest offers three different membership tiers, ranging from $12 to $97 per year.
While certainly not everything we read or hear about personal finance rings true, there is one consistent line of messaging that we can all agree on: Putting our money into investments can help us build real wealth. Now, next time you come across one of the above five myths about the stock market you’ll know how valid those statements really are and be able to adjust your plans accordingly.