Investing is a big part of the puzzle when it comes to building a bright financial future. However, for newbies, navigating how—and where—to invest can be daunting. This week, financial journalist Miranda Marquit debunks three common myths surrounding making your money work for you:
Whenever I mention investing to “regular” folks, I am greeted with a slew of excuses about why investing isn’t for them. Most of the time these excuses are rooted in investing myths.
The reality is that investing is the best way for most of us to build wealth over time. However, persistent myths about investing prevent many people from getting started. Don’t let the following myths hold you back from starting to grow your wealth today:
Myth #1: You need a lot of money to start investing
“It’s not worth investing unless you can start out with at least $10,000,” someone told me once.
While that might have been true three decades ago, when you had to pick up the phone and call a broker, that isn’t the case now. Just about anyone can start investing with $25 and access to the Internet.
There are a number of quality discount brokers online, including TradeKing, E*TRADE, Sharebuilder, TD Ameritrade, and Scottrade. While some brokers may require a minimum deposit, there are enough online brokers who will let you open an account without an initial deposit, or if you are willing to add $25 to your account.
Not only that, but if you sign up for an automatic investing plan, you can even buy partial shares of funds and individual stocks. You can usually set up an automatic investment plan by committing between $50 and $100 each month. The money is taken from your checking account each month, and then deposited in your investment account and used to automatically purchase shares of whatever you indicate.
The longer you follow an automatic investment plan, the more money you will build up over time. Compound interest will work in your favor, so the earlier you start – even if you only start with $100 per month – the better off you’ll be. As you earn more money as your career progresses, you can increase the amount of money you set aside.
(This also works well with tax-advantaged retirement accounts. You can usually participate minimally in a 401(k) plan through your work, or open an IRA through an online broker.)
Myth #2: It’s too difficult and confusing to choose investments
“What if I pick the wrong stock?” a friend recently asked me. “I don’t even know where to begin, and all the information out there is so confusing. I’d have to spend months just to get an idea of what to do!”
This might be true if you are trying to find the “perfect” individual stock to invest in. However, choosing investments for your portfolio doesn’t have to be time-consuming and confusing. Thanks to the rise of index funds and index ETFs, it’s possible to avoid stock picking altogether, and just focus on the market as a whole.
An index funds and index ETFs allow you to gain exposure to entire segments of the market. In fact, there are funds and ETFs that invest in the entire market. Invest in a fund that follows the entire U.S. stock market, and you don’t have to worry about picking the right stock; you benefit from the market’s performance as a whole.
It’s also possible to invest in bond funds, so if you want to diversify a bit and add bonds to your portfolio, all you have to do is choose a reasonable bond fund. Many beginners like investing in U.S. TIPS funds because they are considered fairly safe, and they are inflation-protected.
Studies indicate that asset allocation and the amount that you invest are more important than the actual individual investments you choose. So, use a general rule of thumb, like subtracting your age from 120 to determine how much of your portfolio should be in stocks, and go from there. I will be 35 this year, so my portfolio would be 85 percent stocks and 15 percent bonds at its most basic.
Start out simply, with a low-cost stock fund and a low-cost bond fund, and set up an automatic investment plan. Now that your money is working for you, it’s appropriate to take the time to study investing. As you learn more and become more comfortable with investing, you can change your allocation, and perhaps find more funds to add.
The important thing, though, is to start simply so that you don’t become paralyzed by information overload.
Myth #3: Investing in stocks is too risky
“Stock investing is too risky!” my grandmother told me a couple of years ago. She’s not the first to express that sentiment in my hearing.
However, stock investing, over time is a pretty safe bet. The market, as a whole, has yet to lose over a period of 25 years. If you have a long time horizon, you are likely to come out ahead, especially if you invest in index funds. An individual stock can lose value – perhaps never to recover again. The story is different for the market as a whole.
Over time, the trend line smooths out. Many people look at 2008/2009 and worry about watching their portfolios lose large amounts of value. But look at the situation now. The market has more than recovered since then. Until you sell, you won’t actually realize the losses in a “real” way.
Chances are that there will be other down markets and crashes in the future. However, that doesn’t mean that your portfolio is doomed. Over time, consistent contributions to an investment portfolio that includes low-cost funds or ETFs that follow overall market performance are likely to pay off.
Don’t let these investing myths hold you back. You can build solid wealth over time. Start investing in low-cost index funds and ETFs today, and you can build your nest egg over time without taking on more risk than you can handle.
About Miranda: Miranda Marquit is a financial journalist. Her work has appeared in numerous publications, online and offline. Miranda’s personal finance blog is Planting Money Seeds.