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Some believe investing is this mysterious and complex world reserved only for the privileged few. But they couldn’t be more wrong. Sometimes these myths can take root because there is a semblance of truth, or at least there used to be in the old days. We tend to grasp simplified explanations or unreliable experiences that confirm our biases.
This can lead us to believe these investment myths without considering or examining the underlying facts. A light must be shed on these misconceptions so people can start making more informed investment decisions. We will look at the top 5 important myths about investing that people should stop believing. Let’s do some myth-busting!
Myth #1: “Investing is Only for the Rich”
A prevailing misconception is that investing is a rich man’s game, but that is far from reality. Does having a vast amount of investible surplus make things easy? For sure. But does that mean that it’s only the wealthy elite who can invest? Not. In the past, most investors were from wealthy backgrounds but today, the landscape has dramatically changed. There are many investment options available today that cater to individuals with varying financial capacities and risk appetites which has made investing more accessible than ever before.
Take mutual funds for example. A popular way of investing in mutual funds is a Systematic Investment Plan (SIP). SIPs allow investors to contribute a fixed amount regularly, generally every month, to the funds of their choice. This offers a plethora of benefits, the biggest being that you don’t have to start big. You can begin investing in mutual funds with just Rs. 500 per month. You might be thinking, how far would a small amount go in the world of investing?
But here’s the magic of compounding at play. Suppose you invest Rs. 2 thousand every month, for 15 years into a fund that returns 12%. By the time your investment matures, you will have made over Rs. 10 lakh! If you continue this SIP for another 15 years, your investment will grow to over Rs. 70 lakh! That is the power of compounding interest.
It allows you to earn interest on interest and grows your money exponentially. And this amount you contribute does not have to be static either! As your financial condition changes, as you get promoted, you can increase your contributions. So if you’re thinking that you need to be rich to start investing, think again.
Also Read: Financial Myths That Are Holding You Back
Myth #2: “Investing is Equivalent to Gambling”
It is easy to see how some may think that investing is similar to gambling. Both these activities involve the risk of losing money, and the outcomes can be uncertain. This myth may have also been propagated by the behaviour of some stock investors who use investing in scratching their gambling itch. They invest based on emotion, without conducting proper research or analysis. They think that if their stock takes off they will make a quick profit, just like winning a lottery. But investing and gambling are vastly different.
You may have heard of the phrase “The house always wins.” This means that in most casinos, the odds are stacked in favour of the casino itself. Regardless of individual wins or losses, the overall profitability of the casino is maintained because there is a statistical advantage built into the games. This is not the case with investing. Investing is strategic. A lot of research and analysis goes into making a tailored investment plan. You can also mitigate risk in investing, while gambling is based on fixed odds.
Even with risky assets like stocks, one can diversify across different stocks and asset classes and invest with a long-term mindset. Long-term thinking is advantageous as it allows one to ignore short-term fluctuations, and over time, gains can be made. You can also regularly monitor your investments, and stay informed about market trends. Should things change, you can always readjust your portfolio. You can’t do that in a casino. Once you’ve bet on red and the roulette wheel starts spinning, you are locked in, and whether you win or lose is dictated by simple odds.
Myth #3: “You Need a Lot of Money to Start Investing”
You need not have a minimum amount saved before you can start investing. You can invest in affordable investment options such as mutual fund SIPs. Some believe that investing small amounts can only yield insignificant returns, but they’re wrong. SIPs are powerful instruments even if you start small, as they offer benefits such as:
- Accessibility – The entry barrier is quite low, which makes investing accessible to a wider range of people. This includes individuals who are new to investing, those who have limited savings to invest, and those who want to dip their toes into the world of investing to test out their risk tolerance and investment strategies without committing a large amount of money upfront.
- Convenience and Flexibility – There are many apps online that allow you to quickly set up and manage mutual fund SIPs from the comfort of your home. You can use these apps to monitor and track your investments and make adjustments as needed. SIPs are also flexible, as you don’t have to fully commit to the original contribution amount. You can increase the contribution should your income increase, and you can pause or decrease the contributions if you are faced with unexpected expenses. You can even change the frequency of contributions from monthly to quarterly or semi-annually.
- Discipline – SIPs instill a habit of disciplined saving. Since you are committing to contribute a fixed amount every month, you’ll get into a habit of budgeting and saving, which is important for achieving long-term financial goals.
- Professional Management – Mutual funds are managed by professional fund managers, who are experienced experts, and conduct in-depth research, analysis, and market monitoring to identify promising investment opportunities and manage risk effectively. They work with a team of analysts and work towards achieving the fund’s objective. Knowing your money is being handled by a professional brings peace of mind, and saves you the time and effort of researching and managing investments on your own.
- Diversification – The fund manager doesn’t just invest in a single stock or asset class, but rather a mix of stocks, bonds, and other securities. This is called diversification, and it helps spread risk across different investments. This reduces the impact of any single investment’s performance on the overall portfolio. Through this, you can gain exposure to 40 or 50 companies across different industries which can help mitigate the impact of market volatility.
- Rupee Cost Averaging – When you invest a fixed amount regularly, you ignore the market conditions. You buy fewer units when the prices are high, and more units when prices are low. This evens out the cost of your investments over time and reduces the influence of market volatility on your portfolio.
- Compounding Interest – One of the biggest advantages of mutual funds SIP is compounding interest. It is the reason why one can start small and earn big. The interest you earn gets reinvested, which allows your money to grow exponentially.
There are a few important things to understand about SIPs. Firstly, the earlier you start the better, because the power of compounding works best over time. Secondly, try to stick to your investment plan regardless of short-term market fluctuations. A long-term mindset works best. Thirdly, you should also monitor your investment regularly. If you strongly feel the fund’s objectives no longer align with your financial goals, you should readjust your strategy.
Also Read: How to Invest in SIP?
Myth #4: “Investing is Too Complicated”
There is an iota of truth in this one, but the thing is that investing doesn’t necessarily have to be complicated. If you are mainly investing in companies and buying their stocks, no doubt you’ll have to do your homework. You’ll need to research the company’s financials, and performance, understand how it operates, assess its competitive positioning, and stay informed about market trends. And since you won’t be investing in a single company, you’ll have to repeat this process for each stock in your portfolio. But stock investing isn’t the only option available. You can invest in options such as mutual funds and ETFs that offer diversification without the need for extensive research into individual companies.
Once you get started with investing you’ll also learn invaluable lessons along the way. You’ll understand how the markets work, how economic events impact your investments, and understand risk better.
There are also many reliable financial tools, articles, podcasts, and channels online that provide valuable insights and guidance for investors of all levels. These resources can help you stay informed and improve your investment knowledge and skills. Slowly you’ll find that investing isn’t as complicated as it seems.
An investment advisor can also help you figure out the world of investing. They can create investment strategies tailored to your financial goals, risk tolerance, and investment horizon and help you make better decisions.
Myth #5: “You Can Time the Market”
Timing the market means trying to predict how the markets will move in the future, and buying or selling assets based on the anticipated fluctuations. Those who try to time the market think they can buy assets at low prices and sell them at high prices and maximise their returns. But it’s quite risky to attempt this.
You would have to spend a lot of time and effort to identify when a company’s stock is going to hit the peak and when it will bottom out. In this process, a lot of faith is put into what is basically trying to predict the unpredictable. Many who time the market think short-term and act based on emotions rather than comprehensive analysis.
The risk-to-reward ratio isn’t favourable for those attempting to time the market either. Investors take on significantly higher risks compared to the returns they earn. They may occasionally make successful predictions, but the overall strategy can result in serious losses. This can also lead to missed opportunities. While investors wait for the market to crash, they might miss out on periods of growth due to sudden upswings.
Instead of trying to time the market, your focus should be on creating a long-term investment strategy. There’s a saying ‘Time in the market is better than timing the market’. Mitigate risk with diversification, and tailor your plan according to your financial situation, goals, and investment horizon. Regularly monitor your portfolio and make adjustments whenever necessary.
Conclusion
Investing can help individuals realise all their financial dreams, and it’s an opportunity available to everyone. If these common myths have held you back from investing, it’s time to change your perspective. Focus on gaining knowledge, start small, and stay committed to a long-term investment strategy.
Don’t let these misconceptions hold you back from investing and securing your financial future. Stay disciplined, be patient, and make sure your investment strategy aligns with your financial situation.
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