In a world where inflation is now above 6%, the best way to protect your money, while simultaneously building wealth, is to invest. However, with so much information out there, it’s hard to tell what’s true, what’s a myth, and what is in between. So, let’s dive into five of the most common investing myths circulating out there.
This is a tough one because there are so many variables to consider, including:
Debt interest rate
Return on investment
Size of debt
Type of debt
Let me give you an example. Sam has $10,000 in student loans at an interest rate of 3.70%. Sam also works for an employer who offers a dollar-for-dollar 401k contribution match on up to 4% of his paycheck. Now, what would be the best choice for Sam: forgo the 4% match to pay off all debt right away? Probably not. That 401k match is, essentially, an immediate, 100% return on his investment, versus a 3.70% interest rate on the loan he’d be paying down. The best course of action, numerically, would be to contribute and receive the match, then attack the debt.
However, the common theme I want to get across is that what is best for one person may not be the best course of action for another. But the statement many make, that you should always pay down debt before investing, is questionable because you could be taking on an enormous opportunity cost by doing so. Evaluate your situation, run the numbers, and find what works for you!
Now, this must be the most common myth circulating. “I only have $50. It’s pointless to invest. It’s not enough.” In this day and age, investing has never been more accessible. With fractional share purchasing, you can now own shares of companies — that originally would’ve cost you $1,000 — for as little as $5.
“But $50 is nothing. It wouldn’t make a dent. What’s the point?” Do you want to see the math? Let’s do the math in another example. Josh is 23 years old and has $50 extra per month to invest. He’s hesitant because how much of a difference could an extra $50 per month really make in his retirement planning? He runs the numbers:
$50 contributed per month
A conservative average rate of return of 7%, annually
He thinks he’ll do this, consistently, for 40 years
What’s Josh left with at age 63 by investing “just” $50 per month? A total of $123,577.10. Do you want to know what’s really shocking? He only contributed $24,000 of that. The other $99,577.10 is what compound interest did for him.
Moral of the story? Even “as little” as $50 a month can turn into over $100,000 in the long run. Some might say, “100k isn’t enough to retire on.” You’re probably right! But it’s more than $0, and you can always increase those contributions in the future to increase the ending balance.
Stop. Save yourself. If anyone promises you this: run. Let’s break this into parts:
“I Can Guarantee You 100% Returns.” — If there’s one thing to understand when investing, it’s that nothing is guaranteed. Markets have upsides and downturns. And if someone says they can predict either, they’d be the richest person in the world. Always be hesitant when someone is promising you large returns.
“Risk-Free.” — This is the icing on the cake. Technically, there is no such thing as “risk-free” investing. Even keeping your money in straight cash is technically risky due to inflation decreasing its value. Someone claiming “risk-free” investments probably has something questionable going on.
The combination of these two ideas makes this statement very hard to believe. Now, not everyone is out there to scam or stretch the truth. But one of the most important lessons to learn is to be hesitant and always question when learning about the investing world, especially when someone is trying to manage your money or sell you on a product or service.
It’s no longer 2008 where only middle-aged men in expensive suits invest. Fidelity Investments studied over 5.2 million accounts and found that female investors outperformed their male counterparts by 0.4% from 2011 to 2020. What a stat!
As I said before, investing has never been more accessible. With a couple of pushes of a button, and even with as little as $5, you can now invest in billion-dollar companies. Long gone are the days when only Wall Street guys invest.
Now, I touched on this previously, but so many people out there are under the impression they should wait until the market drops before they invest because it’s “too high right now.”
I said it above, I’ll say it again, and I’ll say it a thousand times more: if one could time the market perfectly, they would be the richest person on the planet. Don’t wait for the “right time” to invest; just invest and wait. Studies have found that those who wait to enter the market miss out on returns versus those who enter and hold long term.
The takeaway? Buy and hold for the long term, rather than listening to speculation and waiting to enter the market at the top or bottom. Bottom line: Just. Start.
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Dore, K. (2021, October 11). Women investors are still outperforming men, study finds. CNBC. Retrieved December 16, 2021, from https://www.cnbc.com/2021/10/11/women-investors-are-still-outperforming-men-study-finds.html
Stevens, P. (2021, March 24). This chart shows why investors should never try to time the stock market. CNBC. Retrieved December 16, 2021, from https://www.cnbc.com/2021/03/24/this-chart-shows-why-investors-should-never-try-to-time-the-stock-market.html
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