When it comes to investing, anyone can be successful. But as a financial advisor, I often have people tell me they don’t know how to begin. Some even think they lack the ability to be successful investors.
The financial world can seem daunting at first. But in reality, you don’t need a degree in finance to be a confident investor. Most investors don’t have any special qualifications—they’re just regular people who didn’t let common misconceptions keep them from getting started.
I’d like to break down 5 of the most common myths about investing and offer a different perspective for each of them.
- You need a lot of money to get started.
- The stock market is a game, and you need to pick “winners” to see results.
- You need to get in at the right time because the stock market is volatile.
- You need to keep up with financial news.
- You need a lot of time to research stocks and make frequent trades.
You need a lot of money to get started
When I first started working for Vanguard, some friends and family members asked me if we had any investments that didn’t have high minimums. They thought they needed a large amount of money just to open an account. They were happy to learn that many Vanguard investments don’t require a lot of cash to get started.
ETFs (exchange-traded funds) are one example. You can invest in an ETF for the cost of just one share. Check out our list of Vanguard Select ETFs to learn more.
The stock market is a game, and you need to pick “winners” to see results
When people learn I’m a financial advisor, they usually ask me which stocks they should buy. And they’re surprised when I reply, “All of them!” They may not realize it, but my 3-word response is an ultrashort version of Vanguard’s time-tested investment principles: Use diversification to balance out your risk.
Think of it this way: If I ask someone which team is most likely to win the World Cup, they’ll only have an answer if they follow soccer. But if I ask the same person if there will be a World Cup winner, they’ll be able to answer without any knowledge of soccer.
How does this apply to investing? When choosing investments, instead of trying to predict which individual stocks or bonds will be winners, you can opt for a mutual fund or ETF and invest in thousands of them all at once. Following a diversified approach helps balance your risk, because economic conditions that cause one stock to perform poorly may cause another stock to perform well. Diversification can improve your chances of having an overall winning portfolio.
You need to get in at the right time because the stock market is volatile
Nobody—not even financial professionals like me—knows for sure what the market will do. Look at your investment portfolio the way you look at your home. When you purchased it, you probably considered a lot of factors: the number of bedrooms, the size of the yard, its location, and other things that mattered to you. The price of the home was just one part of your decision. If you checked the value of your home right now and saw that it’s worth $20,000 less than you paid, would you want to sell it right away? Probably not. Your home is a long-term investment, so you wouldn’t sell it based on price alone. You should look at your investments the same way.
Just like the housing market, the stock market goes through ups and downs. The most important thing to do is to look at the big picture. Are you still comfortable with your mix of investments? If so, it’s best to stay the course and keep a long-term perspective.
Increasing the savings rate can dramatically improve results
Years needed to reach a target using different contribution rates and market returns
You need to keep up with financial news
A friend recently asked me what I do when companies announce their earnings. Do I hold? Or sell, and plan to buy again later? My response, as an investor, is, “I don’t do anything.” Market events, like a company announcing earnings or paying dividends, have little to no effect on my long-term investment goals, so they don’t affect my strategy. Your investment selection and portfolio strategy should be made based on your life and your investment goals, not on what’s happening in the markets day to day.
Familiarizing yourself with some investing basics can help you put market events in perspective and may make you feel more comfortable as an investor. Keep in mind that a lot of what’s in the news is just noise, and ignoring it doesn’t mean your returns will suffer. Instead of trying to adapt to what’s happening in the market at any given time, ask yourself, “What mix of investments am I comfortable having, given the time I have to reach my goal?” If you’re not sure, learning more about asset allocation and diversification can help you decide.
Why it helps to stay the course: Reacting to market volatility can jeopardize returns
What if someone fled from equities after the 2009 plunge and invested it all in either fixed income or cash?
You need a lot of time to research stocks and make frequent trades
Investing isn’t supposed to be flashy or exciting like a casino. The truth is, investing the right way is actually a little bit boring. Once you’ve put your investing strategy in place, there shouldn’t be a lot of day-to-day activity. You should just need to check in periodically and make any adjustments needed to keep your plan on track.
Time spent researching stocks, making frequent trades, and trying to time the market rarely has the return on investment some might expect. In fact, the odds are against you when it comes to market-timing. Dr. H. Nejat Seyhun determined that an investor’s odds of perfectly timing the market just 50% of the time were 0.5 raised to the 816th power.* In other words, virtually zero.
While timing the market doesn’t produce returns, time in the market is essential to producing returns.
If you’d invested $1,000 in an index fund that tracked the S&P 500 on January 1, 1980, and didn’t touch it, you’d have had nearly $70,000 by 2020. But if you pulled your money out of the market a handful of times and accidentally missed the 5 best days of market returns during that period, you’d only have $43,000. You’d have lost out on $27,000 just for missing those 5 days. Instead of asking when you should buy and sell, ask yourself if you’re invested appropriately for your financial goals and if you’re saving enough on a regular basis.
Want to learn more?
Access our educational resources to find helpful information, no matter where you are on your investing journey.
*H. Nejat Seyhun, Stock Market Extremes and Portfolio Performance (Towneley Capital Management, Inc., 1994), 10.
All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. Investments in bonds are subject to interest rate, credit, and inflation risk.
You must buy and sell Vanguard ETF Shares through Vanguard Brokerage Services (we offer them commission-free) or through another broker (which may charge commissions). See the Vanguard Brokerage Services commission and fee schedules for full details. Vanguard ETF Shares are not redeemable directly with the issuing fund other than in very large aggregations worth millions of dollars. ETFs are subject to market volatility. When buying or selling an ETF, you will pay or receive the current market price, which may be more or less than net asset value.
“5 common investing myths”,