Investing is the best way to quickly grow your wealth, so why don't more people do it? I imagine one reason is that many of them have some misconceptions about what investing entails.
I used to be one of those people, and because I didn't challenge my misconceptions for many years, I missed out on a valuable opportunity to make a lot of money. I don't want that to happen to anyone else, so I'm here to bust three of the most common investing myths.
Myth 1: Investing is hard
If you told me 10 years ago that I would one day be teaching people the basics of investing, I would've thought you had confused me with someone else. I didn't even know what a bond was or the difference between a mutual fund and an exchange-traded fund (ETF).
But as my job began pulling me deeper and deeper into the world of finance and investing, I learned that it's really not that complicated at all. A stock is just a part-ownership in a company, and when the company does well over time, it becomes worth more and your share value increases.
A bond is a type of loan you give to a company or government. They pay you interest over several months or years. Then, at what's called the maturation date, which you know when you purchase the bond, it pays you back the initial amount you lent the borrower. You probably won't make as much investing in bonds as you could with stocks, but bonds are more predictable, so there's a smaller risk of loss. It's good to have some stocks and bonds in your portfolio.
Mutual funds and ETFs are both bundles of stocks you buy together. The biggest difference between them is that the price of mutual funds is set once per day while ETF prices can fluctuate throughout the day like stock prices. When you spell it out like that, you can see that investing is a lot simpler than most people think.
Myth 2: You have to be able to pick your own stocks
Since I didn't understand what mutual funds or ETFs were when I was younger, I tended to ignore them. That led me to assume that investing well meant being able to choose your own stocks. I thought only people who had studied investing for years and had the patience to spend long, tedious hours reading up on companies and comparing metrics could do that successfully. And that definitely wasn't me.
But in reality, you don't need to know much of anything about picking stocks to invest well these days. One great option for beginners is to invest in index funds. These are mutual funds or ETFs that mimic a market exchange, like the S&P 500, which is made up of 500 of the largest companies in the U.S.
Investing in one of these index funds gives you an instant stake in these 500 companies, and because your money is diversified among many businesses, you don't have to worry so much about how any one stock is doing.
There are also robo-advisors that can create a custom investing portfolio for you based on your answers to a few questions. You don't have to worry about choosing anything. All you have to do is add money periodically or link a bank account and set up a contribution schedule. The robo-advisor does the rest.
Even if you want to invest in individual stocks, choosing a winner probably isn't as complicated as you think. The goal is to select companies that are going to perform well over the long term, and often those companies are industry leaders right now. Think about Netflix, Amazon, and Apple. While they have their competitors, they're strong companies with brand recognition and innovative products and services, so there's good reason to believe they'll still be doing well in the years to come.
Myth 3: Investing requires a lot of money
Another reason I never bothered to learn more about investing when I was younger was because I didn't think I'd be able to afford it anyway. I thought the only way to end up with a sizable profit was to invest thousands of dollars — or even tens of thousands — from the start. But once again, I couldn't have been more off base.
Many brokers these days don't require minimum balances to open an investment account. And an increasing number are allowing their customers to invest in fractional shares — you can purchase a portion of a stock share, rather than a full share. For example, if the stock you want to buy is $100 per share and you only have $20, you could purchase one-fifth of a share using fractional shares. It's otherwise the same as owning a full share, so it's a great way to invest in more-expensive stocks even if you don't have a lot of money.
As for how much you can actually grow your wealth when investing small amounts of money, you might be surprised. If you invested $5 per week every week for 30 years and you earned a 7% average annual rate of return, you'd end up with nearly $25,400, despite only contributing $7,800 of your own money. That's a profit of roughly $17,600.
While it's true that investing can certainly become complex as you dive deeper into it, you don't need to wait until you've learned it all to give it a try. In fact, if you do that, you'll probably never even start. Even the most seasoned investors know there's always more to learn, but one of the best ways to increase your knowledge is to practice. Start slow, but don't put off investing any longer. The sooner you begin, the sooner you can reach your financial goals.
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