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There are some persistent misconceptions about the stock market and investing that seem to regularly pop up in general discussion.
To help you out, I decided to gather the most common of them and explain why they aren’t necessarily true.
Myth 1: You Can Time the Market
It’s been proven time, and time again, that there’s no method by which you can consistently and correctly time the stock market.
Timing the market requires accurate predictions of the future, which has proven to be impossible.
Still, this doesn’t stop people from trying and even fostering illusions of having predictive abilities.
This also implies that there really is no perfect time to begin investing. As long as your financial situation is sound, it’s best to start investing as soon as possible.
Many investors have the idea of buying low and selling high, which in theory is of course a good strategy.
In reality, unfortunately, people rarely succeed in knowing when the stock is cheap or expensive enough. More often than not, timing the market doesn’t grant you higher returns.
Myth 2: Investing Requires Exceptional Intelligence
It most certainly does not. If it did, I would’ve had to quit a long time ago.
What successful investing does require, however, is firmness of character, a clear investment strategy, and patience.
As you can imagine, there are more intelligent people than people with firm character.
Think about passive index investing, for example. Essentially all you need to do is to pick a widely diversified stock index and maintain a regular investing plan. This hardly recalls a genius.
What it does recall, however, is the discipline to stick to your investing plan, and the patience to allow for compounding returns over time.
Myth 3: Investing Is Extremely Risky
Investing itself is neither risk nor risk-free. It’s the investing strategy and investor behaviour that define how risky it is. Just to be clear, the risk we’re talking about here is the risk of losing your money.
If you put all your money in a highly speculative growth stock without having any idea what the company does, there’s a very real chance of losing your money.
Then again, if you have a well-diversified portfolio of profitable companies you know well, the risk of losing your money is a lot smaller.
Investing will always be riskier than putting money in your savings account, but stock markets also tend to offer far more generous returns in the long run.
Myth 4: You Must Constantly Follow the Market
The big stock market movements are practically impossible to predict. Yes, we all know that sooner or later the stock market will crash, and after that, it will rise again. The problem is that we don’t know when, which makes market speculation rather pointless.
What’s more useful is to have a general idea of where the stock market cycle is going at the moment. It’s enough to know whether stocks are cheap or expensive in general.
For stock investors, it’s more efficient to focus on following the stocks you own instead of the market itself.
Myth 5: You Shouldn’t Hold Cash
Investors are often reminded of the dangers of holding cash. The common argument is that holding too much cash will ruin your portfolio performance.
In reality, I believe I’ve never heard of an investor who was ruined by holding too much cash. I have, on the other hand, heard about investors who wasted their cash on overpriced stocks due to fear of missing out.
While inflation does erode money’s purchasing power and is a real concern, it’s a lot better to hold cash than spend it to buy something wildly overpriced. One shouldn’t buy when there’s nothing to buy.
Myth 6: Investing is Gambling
Those unfamiliar with investing basics sometimes tend to view investing as a 50/50 gamble. In other words, your chances of making a profit are 50% since a stock can either go up or down.
In reality, it’s a bit more complicated than that. Yes, the stock price will indeed either go up or down in the long run, but it’s not a random movement. In the short term, on the other hand, stock price movements are somewhat random.
This is because, in the long term, stock prices are, dictated by a company’s fundamental factors. If the company does well or even better than expected for a long time, the stock price will eventually go up.
Therefore, as opposed to a coin toss, in investing, you can increase your chances of a positive long-term outcome.
This can be done, for example, by knowing what you invest in, creating a sound investment plan, and (surprise, surprise) investing in great companies.
Myth 7: What Goes Down Must Come Up
Every once in a while, I hear the classic saying: “The stock is so cheap it’s bound to rise”.
I hate to break it to you, but a stock is not bound to do anything. The stock is not aware of its pricing.
There’s usually a good reason if the stock price keeps dropping over the years and stays down. On some occasions, it might be that its intrinsic value is truly higher, and the market is wrong, but that depends on the company’s fundamentals, not on its stock price.
Myth 8: What Goes Up Must Come Down
In the REALLY long run, all companies go bankrupt. This is not to say some stocks can’t go up for a long, long time. If someone would’ve said in the ’80s that Apple would be worth over 3 trillion dollars four decades later, no one would’ve believed it.
The same applies today. In the future, there might be companies worth hundreds of trillions of dollars.
Therefore, what goes up can keep going up for a long, long time. Long enough to last an investor’s lifetime.
Myth 9: A Stock Is the Same for Everyone
People often forget that the same stock can be both a great and a terrible investment for different investors. It all depends on your strategy, timing, and financial goals.
Great long-term investments can be terrible short-term investments, and vice versa.
So, before evaluating other people’s investment decisions, it’s probably a good idea to first find out whether they’re playing the same game as you are.
