Myths in the stock market can conjure up images of ruthless investors in fancy suits, taking money from the working class. It is time to let go of these myths and the fear they inspire. Here are five common misconceptions about investing, dispelled.
1. You must have money to make money
If Ronald Read were alive today, he might scoff at the idea that it takes money to make money on the stock market.
Read was a gas station attendant and janitor who died in 2014. Based on his work history, his income was likely to be over less than $ 25,000 a year. (ZipRecruiter now sets the national average salary for a janitor at around $ 25,000 per year.)
At the time of his death, Read was worth almost $ 8 million. He achieved multimillionaire status by investing in blue chip stocks and paying dividends for decades. He didn’t get rich because he had a seed fund. He got rich because he had patience and discipline.
2. Investment requires expertise
You don’t have to be a financial genius to invest. The truth is, you can start investing with three pieces of information. The first is the rule of 110, which tells you how to allocate your portfolio between stocks and bonds. Subtract your age from 110 and the answer is the percentage of shares to own. At 35, for example, your portfolio would be 75% stocks and 25% bonds.
Second, you can fill these percentages of stocks and bonds with ETFs. A S&P 500 an index fund can provide your exposure to stocks, and a treasury debt fund provides exposure to bonds.
Third, fund expenditure ratios are decision factors. The expenses of a fund reduce investment returns. If you compare two funds with the same portfolio – say, two S&P 500 index funds – the one with the lower expense ratio should generate higher returns.
It’s the condensed know-how you need to build a workable portfolio. You can and should take the initiative to learn more as you go. But you don’t have to be an expert on day one.
3. Investing is too risky
You can lose money on the stock market. You can also destroy your car while driving, break your ankle while going down the stairs, or start a fire while making fried chicken. Still, you drive, attend basement parties, and cook. You can also invest with the right precautions.
A large ETF spreads your risk over many different positions. But you can also take a more targeted approach to protect yourself from volatility. Choose quality stocks that pay dividends and have a history of resisting market downturns. Look for utility companies, manufacturers of consumer staples, discount retailers, and healthcare companies. These sectors often show less volatility when times are tough.
You should also plan to hold your stocks (and funds) for many years. The stock market has never lost value over a 20-year period. That’s not to say it won’t happen in the future, but you can reasonably expect to see less volatility over longer periods than over shorter periods.
4. You have to beat the market
Beating the market is overrated. Don’t get me wrong, it’s fabulous when it happens. But you don’t have to beat the market to make money.
If you start investing early enough, market-level returns of 7% after inflation are enough to make you richer. Give yourself 30 or 35, for example, and the market can take you to a million dollars with a monthly investment of $ 600 to $ 900.
There is no shame in taking what the market gives you, especially if it makes you a millionaire. If you like the competitive aspect of trying to beat the market, you can devote 5% of your portfolio to speculative games. That way, missteps won’t take you out of the game.
5. Cash is safer
Cash is safer than investing in just one aspect. It doesn’t fluctuate in value like stocks do. The trade-off is that money always loses its purchasing power due to inflation over time. For this reason, I would say that money is not really safer than investing, but it is complementary.
You need cash for liquidity and stability. And you need stocks to beat inflation. It’s hard to build wealth with either. It takes both.
Your profitable future
You don’t need a lot of money or a finance degree to be successful in the stock market. You can do this with a simple wallet, some money set aside for emergencies, and a long lead time. There will be risk and you will see market volatility. But accepting those results opens the way for you to wealth – and it’s a commendable compromise.