Numerous misconceptions surrounding investing continue to deter individuals from entering the stock market. You may have heard claims that investing is akin to gambling or believed that a significant sum of money is required to begin. These misconceptions, among others, hinder many from capitalizing on market opportunities and expanding their wealth. However, the truth is that modern investment platforms have made market participation more accessible, and research consistently demonstrates that patient investors have historically benefitted from long-term investing. The notion that substantial funds are necessary to start investing has been debunked by the availability of fractional shares and commission-free trading.
While all investments carry risks and do not guarantee returns, a key element of a successful long-term strategy is to distinguish between fact and fiction and avoid emotional decision-making. We will explore five prevalent investing myths and unravel the reality behind them.
Included in this article:
Myth #1: “A large sum of money is required to commence investing”
Myth #2: “Extensive experience is needed before embarking on investment ventures”
Myth #3: “Investing is simply a sophisticated form of gambling”
Myth #4: “Cash is a safer option compared to stocks”
Myth #5: “Higher risk equates to higher rewards”
How can you select an investment platform that aligns with your requirements?
Myth #1: “A large sum of money is required to commence investing”
The era in which investing demanded thousands of dollars to initiate has passed. Modern investment platforms have significantly reduced barriers to entry, enabling individuals to kickstart wealth accumulation with minimal funds. “There exists a common misconception that investing is solely reserved for the affluent, either due to financial institutions turning away those in lower income brackets or due to perceived entry fees. Leading retail brokerages now offer no-fee, fractional share investing starting as low as $1 invested,” explains Thomas Maluck, an NFEC-accredited personal finance educator in Columbia, South Carolina.
Even traditional brokers have eliminated fees and trading commissions on stocks and ETFs, rendering investing more accessible than ever. Moreover, most platforms now offer fractional shares, enabling investors to purchase portions of stocks rather than whole units. For instance, instead of requiring $230 for one Apple (AAPL) share, you could invest $10 and own approximately 4.3% of a share.
**Understanding ETFs:** An ETF is a collection of stocks and other assets that can be acquired in one transaction. When you buy an ETF share, you are essentially purchasing small portions of hundreds or thousands of companies. For instance, an S&P 500 ETF allows you to own a segment of the 500 largest American companies with a single purchase. Mutual funds operate similarly but are typically more actively managed and may necessitate higher initial investments.
The amalgamation of commission-free trading, fractional shares, and diversified funds has revolutionized investing for the general population. Below are details on what to expect in terms
Automated investing: $0
Mutual funds: $3,000
Self-directed investing: $0
Annual advisory fee for automated investing: 0.20% to 0.25%
Average annual expense ratio for mutual funds: 0.09%
Fidelity fees:
– Automated investing: $10
– Self-directed investing: $1
– Annual advisory fee for automated investing: 0% to 0.35%
Expert Tip: Start with micro-investments ranging from $1 to $10 on platforms like Acorns, SoFi Invest, or Wealthfront to develop good investing habits. As your portfolio grows, consider transitioning to traditional brokers like Vanguard or Fidelity. Some micro-investing platforms round up your debit card purchases to the nearest dollar for automatic investing.
Acorns Invest offers automated investing with fees starting at $3 a month. Different recurring investment amounts provide access to fractional shares of stocks or ETFs, a diverse portfolio of fractional shares, or access to most mutual funds, depending on the amount.
Consistency is key when investing, regardless of the initial amount. Dollar-cost averaging is a simple and effective strategy to work towards your financial goals while managing risks.
Investing doesn’t require years of experience. Modern investment platforms have simplified the process, making it accessible to all, without the need for extensive market knowledge. Broad market funds offered by these platforms allow you to invest in numerous companies effortlessly.
Research shows that new investors often find investing easier than expected once they start. Educational tools provided by investment platforms help users understand key concepts and terms, making investing more approachable. Popular broad market funds include S&P 500, Total U.S. stock market, International stocks, and Global stock market.
Investing in inflation-protected bonds can be a smart move to protect your money from inflation. If you’re interested in investing in market funds, here’s a simple guide to get you started. Just like adding items to your online shopping cart, investment platforms allow you to buy fractional shares of funds with ease.
1. Open your investment platform or app.
2. Search for a fund you’re interested in, such as VOO for the S&P 500.
3. Enter the amount you want to invest – even $5 works with fractional shares.
4. Review your order details.
5. Place your order, and you’re all set.
You can also set up automatic weekly or monthly investments to grow your portfolio consistently without constant monitoring. This approach of investing in broad market funds has historically provided steady returns for investors of all experience levels, spreading their risk across various companies and industries.
To build wealth through simple habits, start by developing good investing practices early on. Successful long-term investors often follow these principles:
– Start small and remain consistent with your investments.
– Keep your investment strategy simple by focusing on broad market funds.
– Pay attention to fees and opt for low-fee index funds.
– Ignore short-term market fluctuations and stay focused on your long-term goals.
While investing has become more accessible, it’s essential to understand your risk tolerance and investment timeline. While broad market funds offer steady returns over the long term, all investments carry some level of risk. Consider working with a financial advisor if you’re unsure about managing your investment risks effectively.
Remember, investing is not the same as gambling. By owning pieces of profitable businesses and letting your investments grow over time, you’re participating in the wealth-building process rather than relying on luck or chance.
Investing and gambling are two different approaches when it comes to finances. Here are the distinctions:
Gambling
– House always wins
– Earnings are based purely on luck
– Money can disappear instantly regardless of past wins
– Does not provide ownership stake
– Zero-sum game
Long-term investing
– You own actual assets
– Earnings are based on company performance
– Historically grows over time even after recessions
– Provides partial company ownership
– Creates real value
It is recommended to aim for long-term investments to mitigate the impact of short-term market volatility. Market data demonstrates the benefits of patient, long-term investing, with the S&P 500 averaging 10% per year over a century.
There are key differences between speculative trading and long-term investing:
– Time horizon and goals
– Research and analysis
– Risk management
– Value creation
Successful investing involves understanding market principles and maintaining a long-term perspective. By focusing on solid companies or broad market indexes and remaining invested through market fluctuations, you can systematically grow wealth over time.
While holding cash may seem safer than investing in stocks, it can put your financial security at risk due to inflation eroding the purchasing power of your savings. The Federal Reserve aims to keep inflation around 2% annually, but historical rates have averaged about 3.27% annually since 1914. Holding too much cash could lead to a decrease in purchasing power over time.
Here is the revised text:
Purchasing Power in Today’s Dollars
| Investment Type | Average Annual Return | After 10 Years | Real Purchasing Power |
|—————————–|———————–|———————-|————————|
| Cash (no interest) | 0.00% | $10,000 | $7,249 |
| Traditional savings | 0.41% | $10,418 | $7,552 |
| High-yield savings | 4.00% | $14,802 | $10,729 |
| S&P 500 index fund | 10.00% | $25,937 | $18,801 |
*Assuming 3.27% average annual inflation
Your bank statement may show the same number or slightly more, but the actual value of your money is steadily declining. Even with a traditional savings account earning the national average annual percentage yield (APY) of 0.41%, it wouldn’t keep up with inflation. For example, $10,000 would grow to $10,418 after 10 years but would only buy about $7,552 worth of goods and services in today’s dollars.
By placing your money in a high-yield savings account (HYSA) earning 4.00% APY, you can combat inflation while keeping your money secure. With this approach, your $10,000 would grow to $14,802 and maintain $10,729 in purchasing power. Since these accounts are FDIC-insured, you can’t lose your principal.
Alternatively, investing your money in an S&P 500 index fund historically provides the best protection against inflation, with average annual returns around 10%. This strategy could turn $10,000 into $25,937 after 10 years, or $18,801 in real purchasing power. However, unlike savings accounts, stock investments can lose value and aren’t guaranteed to match historical returns.
The definition of “safe” heavily depends on your goals. Here’s how you can approach it:
– Emergency funds: Keep three to six months of expenses in a high-yield savings account for immediate needs and unexpected costs. This money should be easily accessible.
– Short-term goals: Utilize cash equivalent investments like certificates of deposit (CDs) and government bonds for money needed within two to three years, such as a home down payment.
– Long-term wealth: Invest money not needed for 5+ years in stocks or stock funds to combat inflation and increase purchasing power over time.
For more in-depth information, consider exploring how much you should have in your 401(k) and how your balance compares to others by age. Additionally, be cautious of myths around investing, such as the misconception that “high risk means high rewards.” This belief has led many to chase trendy but volatile investments, potentially resulting in significant losses. It’s crucial to focus
Today’s price of $97,000 may appear to be a bargain compared to past prices, which could have been inflated due to temporary market euphoria. Many investors fall victim to the sunk cost fallacy, holding onto losing investments simply because they have already invested significant money, time, or emotional energy into them. While broader markets historically recover over time, certain individual stocks or cryptocurrencies may never return to their previous highs.
Recency bias is another common pitfall where investors give undue weight to recent events and assume they will continue indefinitely. This bias can lead to buying high out of optimism and selling low out of fear, particularly during bull or bear markets. Confirmation bias also plays a role, as investors seek information that supports their investment decisions while disregarding contradictory evidence.
Looking at the performance of high-risk assets since reaching their peaks, we can see significant declines in prices. For example, Bitcoin has dropped 10.2%, GameStop by 69.4%, and Peloton by a staggering 94.9% as of February 7, 2024. These price movements illustrate the volatile nature of such assets, regardless of the potential gains they offer.
A reality check reminds us that market behavior can be unpredictable, with many investors shying away from buying when prices are low and rushing in when a sale is over. The key to successful investing lies in building a diversified portfolio that aligns with your risk tolerance and time horizon. While high-risk investments can have a place in your portfolio, they should not dominate it. Most investments should be in broadly diversified, lower-cost mutual funds or ETFs.
When choosing an investment platform, consider factors such as account fees and minimums, investment options and allocations, user experience and tools, account types and flexibility, as well as client guidance and support. Finding a platform that suits your needs and aligns with your financial goals can help you navigate the stock market effectively and make informed investment decisions.
Consulting a financial professional can greatly benefit your investment journey. For example, SoFi Invest offers complimentary sessions with investment advisors, and Wealthfront features a financial plan builder tool within its app to assist you in mapping out your future financial goals. If you are eager to learn more about investing and expanding your wealth, consider exploring topics such as the best approaches to invest and grow $50,000, the comparison between money market accounts and money market funds for managing your cash effectively, strategies to recession-proof your retirement savings, and insights into annuities before making a purchase.
Moreover, understanding concepts like the 4% rule for retirement, discovering low-risk investment options suitable for retirees, grasping the workings of Roth IRAs and how to initiate one, as well as finding answers to frequently asked questions about investing and managing your finances can pave the way for better financial decision-making.
Wondering if $1,000 is adequate to start investing? Absolutely! With many brokerage firms allowing fractional shares and commission-free trading services, beginning with $1,000 can enable you to create a diversified portfolio utilizing ETFs or opt for a robo-advisor to automate your investment management. Consistently setting aside $100 per month into broad market index funds can also help you capitalize on the growth potential of the stock market.
If you’re a novice investor pondering about the best stocks to buy, consider opting for low-cost index funds like S&P 500 ETFs over individual stocks to mitigate risks associated with stock selection. These funds offer instant exposure to a multitude of major companies, thereby spreading your investment risk and historically delivering favorable returns.
When seeking a secure placement for your funds, high-yield savings accounts and certificates of deposit (CDs) emerge as safe options that also yield moderate returns. These accounts are safeguarded by FDIC or NCUA insurance, ensuring protection for amounts up to $250,000 per bank. While the returns may not match those of the stock market, such investments enable your money to grow steadily with minimal risk exposure.
Referencing sources such as the Consumer Price Index and insights from financial experts can further enhance your understanding of market trends and investment strategies. By delving into various personal finance guides and leveraging the expertise of professionals like Yahia Barakah, a seasoned finance writer, you can gain valuable insights into managing your finances effectively and positioning yourself for long-term financial stability.
