Don’t believe these common money misconceptions.
With the nearly limitless amount of educational information available today, there’s never been a better time to learn about investing. Unfortunately, there is plenty of misinformation to go along with all the useful resources. The stock market can be extremely complicated, and not everyone who blogs or posts info about investing on message boards or social media sites has taken the time to provide accurate information. Even now, there are still stock market myths and misconceptions that investors believe to be true. Here’s a look at nine of the most popular investing myths.
Stocks are riskier than bonds.
It’s understandable that investors would believe this myth because the stock market is so volatile on a month-to-month or year-to-year basis. However, on a longer-term time horizon, the U.S. stock market has been remarkably consistent. Since 1926, the rolling 30-year average annual return of the Standard & Poor’s 500 index has stayed between 8 and 15 percent nearly the entire time. While investment-grade bonds can be extremely low-risk, so can a diversified portfolio of high-quality blue-chip stocks or a low-cost S&P 500 index fund, such as the Vanguard 500 Index Fund (ticker: VOO).
Your money is safe with a professional.
Just because a financial advisor has knowledge about the stock market doesn’t mean he or she is good at investing. In the past decade, 87.5 percent of active funds run by money managers have underperformed the market, according to S&P Global. Surprisingly, financial advisors are not even legally required to act in the best interest of their clients. Until a proposed Department of Labor Fiduciary Rule goes into effect, financial advisors are free to recommend investments based on maximizing fees and commission rather than potential client returns. Finally, there is always the risk of outright frauds and Ponzi schemes.
Buying stocks is like casino gambling.
Once again, people believe that stocks are riskier than they really are because they are thinking in the short term. If investors treat the stock market like a casino by making short-term, highly concentrated bets on high-risk stocks, they will likely experience the same type of terrible returns that the typical casino gambler could expect. However, by selecting a diversified fund or basket of blue-chip stocks, historical data suggests investors can expect annual returns of greater than 8 percent in the long term. There’s no casino in the world that can provide that kind of long-term payoff.
Investing requires a lot of money.
It’s easy to look at $5,000 in savings and think that buying stocks is not worth the effort. After all, an 8 percent return on $5,000 is only $400, which won’t go very far in paying for retirement. While it’s true that investors won’t get rich overnight by investing $5,000 in a diversified portfolio of stocks, the power of the stock market rests in compounding returns. If a person starts investing $5,000 per year in the stock market and gets an 8 percent annual return, that portfolio would be worth more than $500,000 within 30 years.
Past performance guarantees future returns.
An investment’s past performance on a long enough time frame can be an important indicator of what to expect in the future. But assuming that a stock, bond or commodity will continue its past trajectory in the years ahead can be a risky way of thinking. Traders that attempt to chase the hottest stocks often end up getting burned when those stocks experience short-term regression. Rather than trying to guess where a stock is headed in the short term by looking at the past, investors should choose quality, long-term investments and remain patient through the short-term market noise.
Fund management fees are too small to matter.
Mutual funds and index fund fees may seem so small that they don’t matter, but a closer look at the numbers shows just how much difference 1 percent can make. The average mutual fund investor is subject to annual expense ratio fees of 1.19 percent, hidden costs fees of 1.44 percent, tax inefficiency costs of 1.1 percent and “sneaky behavior” costs of 2.49 percent, according to Forbes. At an 8 percent annual return, a $100,000 investment can grow to $1,006,266 in just 30 years. However, losing just 1 percent annually to fees can drop that 30-year balance to only $761,226.
Gold is the best investment.
Unfortunately, while gold provides protection against inflation, there is little evidence to suggest it is a better long-term investment than stocks. From 1996 to 2015, gold generated an average annual return of 5.2 percent, well below the average annual historical return of the S&P 500. From 1970 to 2015, gold averaged a 7.9 percent annual return, roughly in line with the low end of the stock market’s historical range. While paper money may have no intrinsic value, gold doesn’t either. Like any other asset, gold is only worth what investors are willing to pay for it.
Only insiders make money in stocks.
Wall Street has gotten a reputation for being a collection of money-starved sharks that will eat the average investor alive if given the chance. However, the stock market is not a zero-sum game. As the U.S. economy has expanded, the S&P 500 has steadily climbed and delivered solid returns for all. With the rise of discount online brokers, Wall Street is no longer an exclusive club. The average investor can simply buy and hold a low-cost index or mutual fund and enjoy the ride.
Popular companies always make good stocks.
Just because a company has a recognizable brand or a popular product doesn’t mean the company’s stock will be a good investment. The market reacts to a number of different valuation metrics other than brand popularity. Investors value stocks based on share structure, earnings and revenue growth, company debt levels, subscriber counts, same-store sales and countless other industry-specific numbers. For example, Facebook (FB) and Twitter (TWTR) are two of the most popular and successful social media brands in history. However, in the past three years, Facebook shares are up 138 percent, while Twitter stock is down 45 percent.
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9 Investing Myths That People Still Believe originally appeared on usnews.com
