Investing 101
IN THIS LESSON
Investing is often seen as a daunting task surrounded by myths and misconceptions. In this blog post, we’ll debunk some of the most common myths about investing and share tips along the way.
Whether you’re a novice investor or seasoned pro, adopting a disciplined approach, staying informed, and diversifying your portfolio can help you achieve your financial goals and secure a brighter future.
Myth #1: Investing is Gambling
One of the most pervasive myths about investing is that it’s akin to gambling. While both involve risk, investing is fundamentally different from gambling. Investing involves carefully making informed decisions based on historical data, market trends, and economic indicators. In contrast, gambling relies on chance and luck, with outcomes largely unpredictable. By diversifying your investment portfolio and adopting a long-term perspective, you can mitigate risk and maximize returns, making investing a strategic endeavor rather than a gamble.
Gambling is a big business and math is the universal language, and it rarely ever lies. Each game you play at a casino has a statistical probability against you winning — every single time. While this house advantage varies for each game, it ultimately helps to ensure that over time, the casino won’t lose money to gamblers.
In contrast with investing, however, over every 20 year period of the stock market, you made money 100% of the time (Crestmont Research). While there are market fluctuations, you don’t loose or make money until you sell the investment, and if your aim is to hold the investment for a period of time, chances are you will make money due to not only market growth but also compound interest.
Myth #2: I Can’t Invest Until I Am Debt-Free
One of the most common misconceptions about investing is that you should wait until you are entirely debt-free before you start investing. While it’s crucial to prioritize high-interest debt repayment, such as credit card debt, not all debt is created equal. It’s essential to evaluate the interest rates on your debts and consider whether it makes more financial sense to invest or pay off debt.
Paying Off High-Interest Debt:
High-interest debt, such as credit card debt, should be a top priority for repayment. With interest rates typically exceeding 15% or even higher, carrying a balance on credit cards can quickly accumulate costly interest charges. As a general rule of thumb, prioritize paying down debt with interest rates above 7–8%, as this is roughly the average return you can expect to receive in the stock market over the long term.
Scenario 1: Investing vs. Paying Off Low-Interest Debt
In scenarios where you have low-interest debt, such as student loans, medical debt, car loans, or mortgages, it may be more advantageous to invest your money rather than aggressively paying off the debt. For example, if you have student loans with an interest rate of 4% and you expect to earn an average annual return of 7–10% by investing in the stock market, you could potentially earn a higher return by investing your money instead of using it to pay off the debt faster.
Scenario 2: Employer-Sponsored Retirement Plans
Many employers offer retirement plans such as 401(k) or 403(b) accounts with employer matching contributions. If your employer offers a matching contribution, it’s generally recommended to contribute enough to take full advantage of the match before prioritizing additional debt repayment. Employer matches are essentially free money, providing an immediate return on your investment that can outweigh the benefits of paying off low-interest debt.
While paying off debt should be a priority, not all debt is created equal, and it’s possible to invest while still managing debt responsibly. By evaluating the interest rates on your debts and considering the potential returns on your investments, you can make informed decisions that align with your financial goals and priorities.
Myth #3: I Need a Lot of Money to Start Investing
Contrary to popular belief, you don’t need a large sum of money to start investing. Many investment platforms offer low-cost or even commission-free trading, allowing individuals to start investing with minimal capital. Remember the power of compounding to grow their investments over time? By starting small and consistently contributing to your investment portfolio, you can build wealth gradually and achieve your financial goals.
Myth #4: It’s Not a Good Time to Start Investing
Timing the market is a common misconception among investors. While market fluctuations may seem daunting, attempting to predict short-term movements can be futile and counterproductive. Instead, focus on adopting a long-term investment strategy based on your financial goals, risk tolerance, and time horizon. By staying disciplined and maintaining a diversified portfolio, you can navigate market volatility and position yourself for long-term success regardless of short-term fluctuations.
Myth #5: I Need a Financial Expert to Do This for Me
While seeking professional advice can be beneficial, you don’t necessarily need a financial expert to start investing. With the proliferation of online resources, investment platforms, and educational materials, individuals have access to a wealth of information to make informed investment decisions. Self-directed investing allows you to take control of your financial future, research investment opportunities, and tailor your portfolio to align with your goals and risk tolerance. Alternatively, robo-advisory services offer automated investment solutions based on your financial objectives and risk profile, providing a convenient and cost-effective way to invest.