There’s a lot of information about investing floating around on the internet and even on social media, offering to help first-time investors. Many of them are useful, however, some are out-and-out lies and misconceptions that can be very costly and significantly hurt your investment portfolio.
We’d like to help you examine and debunk some of the most common investing myths that can get in your way.
Here are seven of those myths that have kept many people from making that first trade.
Myth 1: Investing requires a lot of money: Yes, you need money to make money but you don’t need a fortune to get started in the market. There was a time when some brokers wouldn’t even give you an audience if you weren’t able to invest up to half a million, sometimes even more. Nowadays, it’s possible to open a brokerage account with zero balance and buy just a share at a time. You might think putting your N20,000 savings into the stock market is not worth the effort and risk. After all, a 10% return on N20,000 is only N2,000 and to be fair that’s not much. However, the trick is to get started, make additions at regular intervals and have a plan to grow the amounted invested as your income grows. These and the power of compounding will gradually grow your stash into a big nest egg.
Example: An investment of N20,000 every month with 10% annual return will be worth N41 million after 30 years.
Myth 2: Stocks That Go up Must Come Down: Newton’s third law of motion doesn’t apply in the stock market. Quite all right, there’s something called mean reversion (the theory that prices and returns eventually move back toward the mean). However, a stock price is a reflection of the company’s performance and would only fall if the company is under-performing, might under-perform in the future due to changes in taste/economic conditions/technology or if there is a big investor that needs liquidity and just wants to get out of the stock. As such, if all the stars are properly aligned, there’s no reason why a stock price can’t keep going higher.
Example: Sometimes in early 2017, I bought shares in GTBank at N21 and sold at N30, because its previous high was N32. I thought I book the profit and buy the stock again, when it drops. Alas, the stock kept going up and even went as high as N54.
Myth 3: Investing is too risky: A lot of people stay away from investing because they think it’s too risky. While there is some risk in any investment in the stock market, you are able to choose how much risk you want to take. Certainly, putting all your money in one single stock is very risky. But on a long-term horizon, investing in a well-diversified portfolio, has pretty good odds. While, it is possible that a market crash (or correction) causes your entire portfolio to drop in value. If you hold out and don’t sell into the dip, history has shown that the market will recover and your portfolio will bounce back, particularly if you’ve got a well-structured portfolio.
Example: If you have a portfolio split 60/40 between stocks and bonds (10% yield), even if the market fell 30% (average fall at bad times) in one year, you entire portfolio will only drop by 14%. If the stock market then continues to earn its average annual return of 10%, your portfolio will be back to the starting point in less than 2-years.
Myth 4: Past Performance Indicates Future Returns: Often, a lot of individual investors wait to hear that the stock market or a particular stock is doing well before they decide to invest. But assuming a stock or mutual fund will do well because it did so in the past, is a risky way to think. While it is true that if a stock has generated solid returns over very long period of time, it’s a good bet moving forward. However, there’s nothing that says the same stock won’t underperform in the coming years. It is the idea of chasing the hottest stock that often leaves investors with their fingers burned. The point is this, do your research before buying any stock.
Example: There have been times when a stock has rallied because a just a single investor wanted to acquire a sizeable stake in the business. Now, what happens is this, because the company does not have the fundamentals to support the high price, once the investor has achieved his objective, the bottom falls out and the stock starts tanking.
Myth 5: Popular companies always make good stocks: A great product doesn’t always translate to a good stock, they are two different things. The market reacts to a number of metrics other than brand popularity. The market is on the lookout for debt levels, share structure, growth – whether measured by number of users, revenue or profits and other industry specific metrics.
Example: Guinness still has many of the popular alcoholic and non-alcoholic beverage brands (Orijin, Malta-Guinnes) but over the last 5- years, investors have dumped the stock. The stock has dropped more than 60%. While the stock price of its less popular competitor, International Breweries has gone up by over 400% in the same period.
Myth 6: Investment professionals can help you beat the market: Investment professionals would sell you the idea that they are able to make the right calls and can beat the market. The fact is they all don’t and the few that do, don’t do so on a consistent basis. Yes, there are a few celebrated money managers but for each of them, there are many more out there who are losing their clients’ money. Research shows that only a tiny percentage of mutual fund managers persistently beat the market. Moreover, if you invest in an index fund or a broad market portfolio, there’s a good chance you’ll do as well or better the pinstripe suit money managers. Also, with the technology available nowadays, the individual investor now has access to the data and tools that were hitherto only available to the big money managers.
Myth 7: You money is safe with an investment professional: While there are many upright and caring investment managers, sometimes the tools available to them haven’t necessarily been designed with the best interest of the investor in mind. At times, the product is designed to favour the house. At other times, they may sell you products that aren’t necessarily the best available, or even in your best interest, but will generate a commission for them. There’s also the risk of outright fraud and Ponzi schemes. The important thing is to pay attention to the fine prints. Also, if it seems too good to be true, it probably isn’t.