When it comes to investing, there's a lot of information out there, but not all of it is true. Believing some of these misconceptions can affect your wealth generation goals by holding you back or exposing you to losses.
Some of the most common myths are difficult to distinguish from reality because they carry with them an ounce of truth that makes them appealing to an unsuspecting individual. Others might have been rules of thumb that are currently outdated.
This article will debunk 10 of the most common investment myths.
Read Also: 6 Signs You Are Not Ready to Be Wealthy
The phrases 'it takes money to make money' and 'I have plenty of time to invest later' are typically invoked to justify avoiding investing. This sentiment often stems from a misconception that investing is something to be considered later in life and that there's no rush to start.
However, these beliefs can be a myth.
First, there are many investments you can start with zero capital and more that you can start with less than Ksh10,000. You can also invest in shares and bonds through index funds such as MMFs and equity funds with less than Ksh1,000.
Second, the best time to start investing is yesterday, not in 30 years when you have retired. The rationale behind this is simple: investing at a younger age can offer significant advantages, such as the power of compound interest and the ability to weather market volatility over a longer time horizon.
One of the biggest misconceptions is that all types of investing require active management and constant monitoring, which can be time-consuming.
The truth is investing can be as time-consuming as you want it to be. This is because there are different strategies and options available. You can choose an approach that matches your schedule and the level of involvement you desire.
Whether you prefer a hands-on or hands-off approach, there's something for everyone. The suitability of each depends on your preferences, financial situation, and goals.
For example, if you prefer a hands-off approach and have a long-term perspective, you can consider passive investing. Your investment options here will range from treasury bonds and bills to index funds and mutual funds.
You can also consider outsourcing your investment management to an investment manager or financial advisor if you have the means but lack the time to manage your portfolio.
Finally, if you are busy, you can also invest in technology and automation tools that can simplify the investment process and handle automatic contributions, dividend reinvestment, and portfolio rebalancing.
Investing is often mistaken for gambling, but they are fundamentally different. Unlike gambling, where you're essentially betting on an uncertain outcome, and success depends on luck, investing requires you to educate yourself and take calculated risks, and your success depends on your skills.
To succeed as an investor, you must do your homework and thoroughly understand the product or asset you're putting your money in. Continuous learning and improvement are integral to successful investing. The more you invest, the more you learn, and the better equipped you become to navigate the investing world.
If you're new to investing or lack knowledge, you can consider consulting a licensed financial advisor. These professionals can help you create a portfolio that aligns with your goals and prevent you from investing while solely depending on luck.
Read Also: 7 Money Secrets You Need to Know\
While it is true that you can't succeed by investing blindly, a lack of knowledge about investment products and strategies shouldn't scare you off from starting.
As discussed above, investing is a learning process, and you will ideally get better as you improve your skills. You can do this through self-education, talking to experts, and having a hands-on approach to investing.
Everyone's investment journey begins somewhere, and the most important thing is to take the first step. Consider starting with a conservative portfolio and gradually delve into the more complex products/assets as you become more comfortable and gain more knowledge and experience.
Read Also: Investing for Beginners: How to Get Started
It's essential to recognize that both saving and investing serve distinct purposes in your financial journey.
Saving provides a safety net for emergencies and short-term goals, while investing offers the potential for higher returns and long-term wealth accumulation. Rather than seeing one as better than the other, consider them as complementary strategies:
Saving: A crucial tool for your emergency fund and short-term financial needs, such as planning for a big purchase or vacation. It provides liquidity and peace of mind. Typically, savings will only pay interest.
Investing: It is suited for long-term goals like retirement or purchasing a house, as it has the potential for growth and compounding to help you maximise returns and reach those goals faster. Depending on the product, investing promises income generation through interest and dividends and capital gains through asset appreciation.
When it comes to investing, there's a common belief that has been ingrained in the minds of many: "The higher the risk, the higher the returns." While this statement holds some truth, it's crucial to understand that not all high-risk investments guarantee higher returns.
The relationship between risk and return is far more nuanced and dependent on various factors.
Investing is not a one-size-fits-all strategy. Instead, it's essential to recognize the importance of understanding your personal risk appetite and risk tolerance. Your risk appetite reflects the amount of risk you are willing to accept to achieve your goals, while your risk tolerance reflects the level of losses and market volatility you are willing to endure.
When investing, you should understand the risk-return tradeoff. The level of risk associated with a particular investment or asset product typically correlates with the level of return the investment might achieve. According to FINRA, the rationale behind this relationship is that investors willing to take on risky investments and potentially lose money should be rewarded for their risk.
To maximize returns while managing risk, it's crucial to strike a balance that aligns with your individual financial goals, time horizon, and risk profile. Diversifying your portfolio across different asset classes, conducting thorough research, and staying informed about market conditions can help you make informed investment decisions.
While it can be tempting to try and predict the perfect moment to enter or exit the market, the reality is that market timing is challenging, unreliable, and often counterproductive. This is because:
The myth that you should always copy the crowd when investing, also known as herd mentality, is a common misconception in the world of finance. While it may seem like a safe and easy way to invest, following the crowd without conducting proper research can lead to serious financial consequences.
Herd mentality is a natural human tendency driven by the fear of missing out and the promise of quick gains. However, it can result in investment bubbles and expose you to fraudulent schemes like Ponzi and pyramid schemes, ultimately leading to financial loss.
In the world of investing, it's often better to be well-informed and cautious rather than blindly following the crowd. This requires conducting your due diligence before making a decision.
Approach every investment opportunity with a healthy dose of skepticism and take the time to educate yourself about it. This includes investigating the company or individual offering the investment, checking their track record, and verifying their licensing or registration.
When it comes to investing, the age-old advice of "buying what you know" has been a guiding principle for many and is often attributed to Warren Buffet.
While this approach certainly has its merits, it's essential to recognize that it can introduce a significant risk to your investment portfolio: diversification risk.
Diversification is a cornerstone of risk management in investing. It helps spread risk across different asset classes, reducing the impact of a poor-performing investment on your overall portfolio.
Investing exclusively in assets or products you are familiar with may seem like a safe bet and make you feel more in control. However, this tunnel vision approach can come with its own set of dangers.
One major danger is the missed opportunity cost. By limiting your investments to what you already know, you may overlook other potentially lucrative opportunities in the market. New investment vehicles and strategies emerge regularly. Ignoring them can mean missing out on potential higher returns and growth potential.
To navigate this, it's crucial to keep learning and educating yourself about various opportunities. Staying informed about different assets and strategies allows you to make informed decisions and construct a well-diversified portfolio.
Selling an investment as soon as it starts to drop in value is a knee-jerk reaction that can often do more harm than good. The truth is, the decision to sell should be based on a careful consideration of your individual circumstances and a well-thought-out strategy.
The key factors to consider are your risk tolerance, time horizon, and financial goals.
If you have a long-term investment horizon, market fluctuations may be expected, and you should ideally prepare for them. Conversely, if you are investing in the short term, it's essential to have a different strategy in prioritises capital preservation.
Likewise, by aligning your investments with your risk tolerance early on, you can avoid making impulsive decisions driven by fear during market volatility.
Instead of selling out of fear, it's essential to have a well-defined strategy and risk management plan. Selling an investment should be driven by important reasons, such as rebalancing your portfolio, freeing up capital for other opportunities, or when you have achieved your investment goals.
Read Also: Becoming Wealthy is Like a Game with 7 Rules
In this digital age, we're bombarded with information, some of which is valuable, while others, not very much. As such, investment myths and misconceptions can easily find their way into your feeds and, eventually, your mind, cloud your judgment and potentially corrupt your decisions.
While some of these myths are easy to spot, others may be disguised with a kernel of truth, making them all the more insidious. To protect your financial well-being, it's essential to take every investment advice and information with a pinch of salt. Always do your due diligence, and when you hit a roadblock, consult with an expert.