One of the best things you can do if you want to build wealth over time is to invest. Thanks to the power of compound interest, investing offers one of the most effective ways to grow your nest egg and prepare for financial freedom down the road.
Unfortunately, there is a good chance right now that you believe some of the myths circulating about investing. And since it’s easy to get bogged down with misinformation and do nothing to build your finances for the future, I want to talk to you about four of these investing myths so you can stop believing them now.
1. Investing is Complicated
We feel like investing is complicated, but the reality is that it doesn’t have to be. While some investments are hard to understand, most of us don’t need to use those instruments to get started. Instead, there are plenty of simple and straightforward products, like ETFs and index mutual funds that keep things easy.
While you can certainly increase the complexity of your investments as you learn more, the truth is that it’s simple to start, and you don’t need anything complicated or special to succeed.
2. Investing is Too Risky
Thanks to the way humans process events, it’s easy to believe that investing is too risky. News about flash crashes, the Great Recession, and speculation about impending doom combine to create a climate of fear. Historically, though, the stock market as a whole hasn’t ever lost out over long periods of time (think 20 to 25 years).
If you have a long time horizon, you can make most investments work for you, including stocks. The key is to invest in the market as a whole, rather than pick individual stocks. Index funds that follow large swaths of the market can help you take advantage of long-term market gains to your benefit. Start as early as possible, invest for two or three decades, and you have a much better chance of building a solid nest egg.
3. No One Will Work With Me
Many of us still think that it’s important to have an investment adviser or some other professional to work with us if we want to invest. We remember scenes from movies and TV showing a rich guy calling a stock broker to make trades.
Today, the landscape is totally different. The Internet made it possible for you to use research tools and trading tools to make your own trades. On top of that, there are robo-advisors that can help you work out an investing plan and automatically invest each month.
If you want to work with a person, some financial advisors are available and willing to help you work out an investment strategy without requiring you to place assets under management. Many of these advisors charge a flat fee or an hourly fee. This makes it a little more affordable for you to get a bit of guidance for your plan.
4. I Need A Large Chunk of Capital to Start
Finally, many people are tripped up by the idea that they need a large chunk of capital to start investing. The good news is that you don’t. If you have $50 or $100 each month to spare, you can open an account and set up an automatic investing plan. There are even accounts and apps that will help you invest pocket change or as little as $5 per paycheck.
So don’t let investing myths keep you from building a firm financial foundation.
Readers, what other tips do you have for those who are scared to get started? How did you get over the fear of investing at the beginning?
Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.
They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.
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Can we just say “Vanguard index funds” and forget all these issues? 🙂
Technically we could, but spelling out the reasons why they should go with Vanguard index funds will help convert the skeptics 🙂
I think this is a good list. On (1) some investments can be very complicated, but most will get their best results from the simplest investments as long as they focus on costs (fees and expenses). ETFs and index funds have historically given net returns that have been hard to beat.
But even in this limited space it may look complicated because there are an enormous number of choices out there. Too many choices can lead to paralysis, so to break free just pick a “total stock market” index from Vanguard and you’re good to go. You can split off into international and focused sector ETFs later.
On (2) investing is risky, but it’s “not investing” over the long term that is too risky. You’ll miss out on the growth and the resulting inflation will gradually eat you alive. Make short term price volatility work to your advantage by dollar cost averaging. This way when prices crash your new contributions buy more shares so paradoxically you’re actually gaining ground faster during a bear market than during a bull market.
On (3) if you need one, pick your advisor carefully, the person you select will probably make more of a difference over the long term than which stocks or funds you buy. And like when shopping for funds, costs matter a lot here. Where I work most of the employees self-manage their investments and save the fees.
On (4) I think it’s easier psychologically to start small and let it build like a snowball. Set up your 401k plan deductions as high as you can (and be sure to at least grab your company match), and pick a diversified low-expense equity fund or two. Don’t just put in “what you can spare each month”– retirement savings is a basic need so cut back elsewhere to make these contributions. And by all means don’t pull it out early or borrow against it, this is your long-term financial future.
I’d add a fifth ‘myth’– that investing one’s savings is a game that only college educated white collar professionals with six figure incomes can benefit from after they hit their peak earnings years. Nope, anyone with earned income should be doing this, and the sooner the better!
As for fear, my biggest one was the prospect of getting a pink slip in middle age during a severe recession and not having income to cover expenses. Investing (and saving aggressively) was my path to financial independence. It’s great to be able to sleep soundly through layoff rounds where I work even past my 50th birthday, and for this luxury I thank my younger self for making the right decisions.
That’s a great summary of how to invest. Thanks for laying things out in simple terms for the rest of our readers.