The Misconceptions Of Investing

Being prepared for the future is one of the smartest and best things you can do for yourself. This is especially true when it comes to money, your future self will thank you for starting your investing and saving journey early.

If you’re a young adult or older, the topic of investing must come up pretty frequently during your social gatherings. The idea of using the money you possess to make more money is an enticing one.

If you have never done any investments before, it might be daunting as it can seem like investing is only done by the rich or super-rich. The many unpredictable possibilities and moving parts can also put you off as it sounds complicated.

There are always reasons why people don’t start investing, or why they don’t see through with it. They might be clueless on how to get started and be worried about the pitfalls associated. Others may get cold feet about the “risks” involved and end up not making the first trade.

It is not surprising that many people have many common misconceptions. We will look at some common misconceptions about investing, and put them under scrutiny.

Investing is Gambling

This is one of the misconceptions that cause many people to shy away from investing.

Investing is different from gambling. You are essentially investing in companies when you buy their stocks and shares. Buying a share of common stock actually represents ownership. You read that right! You’re owning a little piece of the company. This entitles the holder to a claim on assets as well as a fraction of the profits that the company generates.

Stock prices fluctuate because investors are always assessing the profit that can be earned by shareholders. With the ever-changing outlook of a company’s business, the projected earnings of a company are also changing along.

The multiple variables and factors involved make assessing a company’s value complex. You will hence need some time and effort to understand these. A company should be worth the present value of profits it is expected to make over the long term. In the short term, a company will be able to sustain itself from its projected future earnings. However, the company’s eventual stock price will ultimately reflect its true value.

On the other hand, gambling does not take into account these important variables and the outcome cannot be predicted using logical analysis. It is entirely based on chance. In simple, gambling transfers funds from someone who has lost a bet to another who won. There is no value creation at all with how gambling works. Investing creates value and can affect or even increase an economy’s wealth. Productivity is increased and better products are developed thanks to extensive R&D as companies compete with each other to increase their value. Therefore, gambling and investing are very much unlike each other.

To sum the main difference up between gambling and investing - gambling is a zero sum game while investing contributes to and affects the wealth of an economy.

Investing is Trading

While both trading and investing are ways to generate profit via financial markets, they are actually different. They are commonly mistaken to be the same, but the only similarity they share is that traders and investors try to profit through market participation.

Some of you may be familiar with the Gamestop (GME) saga where its stock prices have been fluctuating intensely. It reached a high of $483 before plunging very low and remained that way for nearly a month. At current, it looks like the stock is climbing up once more. Because of these extreme fluctuations, it may be tempting to jump on the train. However do keep in mind that this is far from investing.

As with all short term price movements, there is manipulation involved. Detailed inspection of the company’s fundamentals will reveal that the business is actually struggling. Educated investors would know that such stocks are rarely sustainable. Although there is a possibility that the stock price can shoot up with continued manipulation, it will still head back towards its original price because of the fundamentals.

That is the difference between investing and trading.

An investor buys to hold. A trader buys to sell.

A trader’s main objective is to gain profit by selling an asset that has increased in price. An investor’s main goal is to gain returns as soon as possible while holding the asset.

As much as it is tempting to jump right in for profit, we should know that it’s also a very risky decision.

While we are doing an investment, we must know that it is not about trading. Rather it is about understanding your purpose, risk profile, time horizon and meeting your long term goals.

Investing is Savings

Although it is common for people to accumulate wealth for retirement simply through saving money or endowment plans, these are not the only ways to prepare for retirement.

The act of saving money involves little to no risk. Yor savings are funds that you’ve set aside for future purchases or emergencies and can be accessed easily and quickly.

An investment portfolio would usually comprise of bonds, real estate, stocks or mutual funds. These are usually chosen for long term objectives and with anticipation that the investments will generate profit. Investments can generally be categorized as growth investments or income investments.

A saver simply puts money into an account and does nothing else. An investor is a person who actively builds and manages his own portfolio or account.

Consider this:

If you deposited $10,000 in a savings account at 3 percent annual interest, it would grow to $18,061.11 in 20 years. The same $10,000 invested in an investment product earning an average 6 percent a year would grow to $32,071.35 in 20 years.

Making a choice between either saving or investing will depend on your goals for the money and your risk tolerance.

Investing is For The Rich

Being alive in the information age is empowering. Investing is no longer only for brokers or the affluent - nearly anybody with internet access can gather data with the research tools available online. This means you can invest even if you are not of a particularly wealthy background.

Due to this misbelief that investing is only for the rich, some avoid investing as they think they lack sufficient funds to do so. You can actually start investing with some disposable capital or income, but you do not require excessive wealth to begin.

Investments range from small ones like a penny stock to extensive long term ones you might purchase as part of a long-term retirement plan.

A larger sum of money means you have more investment options. One thing to avoid would be allocating all your money into a single investment as this increases risk significantly. Instead, you might want to break up your investments and allocate smaller amounts of money at intervals. This considerably lowers your risk and allows you to start investing earlier, which is better since you’ll likely have more heavy financial commitments as you get older that make it more difficult to set aside investment funds.

Investing is For The Older And More Experienced

The thought of investing is understandably a daunting experience because you’re basically putting your money on something that has no guaranteed outcome. You might not want to invest because it looks like only highly skilled investors with experience will benefit.

There is a common view that investment can or should be done only when you get older. However, investing later in life actually sets you up with an opportunity cost. To illustrate this, let’s imagine you starting to invest at age 50 instead of 30. You’ll need to take up riskier investments to gain the same returns as you would have if had begun at age 30 because of the compounding nature of investments. Starting late also leaves you with less time to bounce back from losses. Make full use of this compounding nature and room to reinvest by starting early with small amounts allocated at consistent intervals.

You can make the process simple for yourself. You don’t have to know everything there is to know in order to start investing! You just have to know your financial needs and risk appetite, then find and decide on a strategy for getting there. You can also rely on our Guided Portfolio to start. Choose one based on your risk appetite, investment horizon, and targeted return!

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