Let's face it. What the stock market looks like from the outside isn't what it looks like from the inside. Newer investors may be surprised this dance isn't as easy as it appeared to be before diving in. Veteran investors, meanwhile, are shocked to see how much things have changed over the years. In short, it's become easy to come to the wrong conclusions about what it takes to make money in the market.
Given this backdrop, investors of all experience levels may want to take a step back and rethink some of their prevailing assumptions. Here's a look at the four biggest myths that need dispelling.
Myth 1: Investments require constant monitoring
A lot of people watch the market's action and scrutinize headlines all day long. But that's a choice rather than a requirement. In fact, if the end goal of that hypervigilance is to spur lots of trading activity, this choice may be doing more harm than good.
The statistics are a bit fuzzy, but an estimated 80% to 90% of day traders ultimately lose money despite paying constant attention to the market's ebbs and flows.
But what if you're not a day trader, but more of a swing trader or even a buy-and-holder who just likes to keep close tabs on things? You'll likely fare better, though know that not even the professional stock pickers are doing particularly well. Standard & Poor's reports that around 90% of actively managed large cap mutual funds underperform benchmark indices like the S&P 500 on a risk-adjusted basis.
The point is, less is more. Time should be doing most of your portfolio's heavy lifting, but you have to leave your holdings alone long enough to let time do its thing. Overexposure to market noise makes it easy to tinker a little too much.
Myth 2: Picking good stocks requires training and experience
The premise makes enough sense on the surface. If most of the professionals in the business are struggling just to match the overall market's performance, then what chance does an inexperienced amateur have?
The fact is, however, a little common sense goes a very long way when it comes to choosing the right holdings. Market leadership, sustainable business models, reliable cash generation, and a clear competitive edge have always been hallmarks of great companies and great stocks. Anybody willing to just look a little bit past the headlines can make good judgment calls about this set of criteria. Investment professionals and fund managers typically run into trouble because they're incentivized to take oversize risk and are pressured to serve as salesmen and spokespeople rather than just be stock pickers. The proverbial “little guy” doesn't have to deal with those distractions.
Myth 3: Investing is an easy way to lose all your money
You've certainly heard horror stories about complete wipe-outs of someone's wealth after a few too many trades soured. What you're not hearing is the rest of the story. In most cases, these people made enormous bets on one or just a handful of stocks based on nothing more than a wish, or they chipped away at their portfolios by trading too often, losing a little more often than winning. Most people eventually make money in the stock market, given enough time. Even the majority of the 90% of actively managed mutual funds that trail the S&P 500 still log net gains that beat inflation!
Bottom line: Don't get greedy or reckless, and diversify. Aim to hold no fewer than 10 stocks, and commit no more than 10% to 15% of your portfolio's value to any one stock. Doing so eliminates the vast majority of your risk of a total monetary meltdown.
Myth 4: You have to start with a lot of money
Finally, while it's true that it takes money to make money, it doesn't take nearly as much to start as you might fear. Most online brokerage firms no longer impose an account minimum, and many offer commission-free stock trading. That can get you going with just a few hundred dollars.
Individual stocks aren't necessarily the best place for newcomers to start, mind you. If you've never invested before, it might be best to start with a well-diversified mutual fund. Many Vanguard funds can be purchased in increments of as little as $1,000, while a handful of Fidelity funds have no minimum purchase requirement. Many fund providers lower their minimums for fund purchases made within IRAs.
Those options are within reach for most investors, and better still, automated recurring investments of new money in established fund positions are possible for as little as $100 per month. This is a nice way of repeatedly putting a little money to work without requiring any ongoing monitoring. In fact, if you're truly in it for the long haul, these recurring fund purchases ensure you're investing at the market's low points, which is exactly when you should be putting money in.
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