Book Reviews | 1:00 PM
It’s time to debunk some of your concerns by discussing investing myths so you can feel confident about investing.
One of the best ways to build a life you love is to ensure you have the financial security to do so. That way, you don’t have to depend on a pay cheque. This is often referred to as ‘financial freedom‘.
Financial freedom is achieved through creating passive income income that you don’t have to trade your time for. Investing is one of the most passive ways to make money, in that your money makes money and you don’t have to do much in return.
And it’s easier to get started than you might think.
Myth #1: Investing in the stock market is gambling
Gambling and investing might seem similar, as both involve a degree of risk and the hope of making money. However, the underlying principles are quite different.
With gambling, money is risked on events with unpredictable outcomes, relying mostly on luck. The odds of winning are low.
Investing in shares is about making informed decisions to invest in companies, typically with the expectation of growth through the increase in value of the share price (capital growth) or by generating income (dividends).
Remember that with investing, you are an owner in a company.
Myth #2: It’s safer to have money in a bank account
Inflation eats away at the purchasing power of your money.
For example, at a 3 per-cent annual inflation rate, in 3 years $10,000 would only be worth $9,151.42. This highlights how keeping cash leads to a loss in its real value, due to the steadily rising annual cost of living.
While investing carries a higher risk than holding cash, it has historically had higher returns over the long term.
Myth #3: I could lose all my money
The share market moves up and down constantly, but it’s only when you sell your shares that you’ve concreted the profit or loss.
If you’ve invested in a diversified, low-cost index portfolio and you’ve invested across many companies from many sectors, you’ve reduced some of your risk.
The likelihood of losing everything due to the market crashing to zero is low.
Many remember the impact of the GFC of 2007-2009, and how it affected people worldwide. But what’s rarely noted is that if investors didn’t have all their eggs in one basket and didn’t pull their money out at the bottom of a crash, their money would have grown over the next 10+ years.
Myth #4: Investing is too complicated
Basically, if you can buy shoes online, you can buy shares. It’s literally that simple to get started.
Of course, there are nuances when it comes to understanding what to buy and what your optimal strategy is and understanding your risk tolerance and timeline but overall, getting started isn’t hard.
The first step is to get confident with the relevant information.
Myth #5: You need to be good at maths
Maths and financial literacy go hand-in-hand and result in some of the best financial outcomes. However, being good at maths isn’t essential.
It’s like fitness. Do you need to be strong to be fit? It helps, but being fit is more about focusing on eating well and exercising consistently. The longer you stay on the path of having a healthy diet and moving your body, the more likely you are to continue to have a positive journey of wellness.
Similarly, investing is about focusing on having a positive money mindset and ensuring you are consistent and intentional.
Myth #6: Just buy low and sell high
It makes sense: buy low and sell high and you’ll be rich. However, in practice it’s really hard to do.
You’d need to watch the market very closely and be ready to buy and sell at any time. Do you have time to watch the market all day, every day?
Not only that, even fund managers can’t be consistent when it comes to predicting what the markets will do, because no-one can see into the future.
Myth #7: You need a lot of money
You don’t need thousands of dollars to start investing. In fact, there are micro-investing options available that enable you to start with as little as $5.
For example, if you invest $20 a month at an average annual return of 7 per cent, in 30 years it would grow to be $22,671, which is way better than not investing at all.
Myth #8: You need a complicated strategy
You can basically invest with one ETF and have a very broad and diversified portfolio.
Putting together an investing strategy can be as simple as determining what to invest in and how often.
Myth #9: Real estate is the better investment
Some people may be better suited to property, while others are better suited to shares. There’s complexity and risk involved in both.
Property markets vary greatly, it’s harder to diversify, and there are liquidity risks (it’s harder to access cash you can’t just sell one bedroom if you need some money). There’s also a high entry cost and ongoing maintenance costs and fees that are often forgotten when looking into investment returns.
There are benefits to property, such as being able to leverage your investments (get a loan) more easily than you can with shares. And, of course, shares and property can work together as a long-term investment strategy.
Edited extract from How to not work forever by Natasha Etschmann and Ana Kresina (Wiley $32.95), available 26 June at all leading retailers.
Disclaimer: Any information here is general in nature and has been prepared without considering your personal goals, financial situation, or needs. Because of this, before acting on the general advice, you should consider its appropriateness, having regard to your unique situation. You should obtain and review the Product Disclosure Statement (PDS) and Target Market Determination (TMD) relevant to the product before making any financial product decisions. It’s also strongly encouraged to seek the advice of a professional financial adviser.
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