“The stock market is filled with individuals who know the price of everything, but the value of nothing.” — Philip Fisher, Investor and Author
More people have access to the stock market than ever. Several companies now offer commission-free trades and attract retail investors with gamified, get-rich-quick ideologies. With millions of people creating their own portfolios (or allowing fear to keep them on the sidelines), it’s important to debunk common misconceptions.
Myth 1: Investing is the same as gambling
While the stock market is unpredictable on a daily basis, it consistently rises over long periods. Rather than dividing the pie in a zero-sum game like blackjack, a company is capable of growing the overall pie, which causes their stock prices to rise.
For example, Google has over one billion active monthly users. By enabling faster access to knowledge, people can also add more value to the world. Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) (the parent company of Google) stock has increased by over 5,000% over the last 20 years, and the S&P 500 has risen 525%.
As an investor, it’s critical to identify stocks that will grow in the long term. As a way to manage risk, investors can use a dollar-cost averaging strategy. This allows you to invest a set portion of money at regular intervals no matter what’s going on with the market.
Myth 2: Day trading is the best investment strategy
If you’re reading this, you probably aren’t paying $20,000 per month for tracking software with four monitor screens to follow specific markets. However, your day trading competition does, and you’d be starting at a significant disadvantage.
While the stock market isn’t gambling in the long term, it’s unpredictable in the short term. Don’t try to outsmart the market over a few days, or even a few months. The most effective strategy is often the simplest one.
Utilizing a buy-and-hold strategy is more efficient tax-wise and takes less time. It can also lead to higher profits due to lower friction costs, fewer psychological mistakes, and consistent long-term market growth.
Myth 3: The stock can only go up from here
This myth has potential to be the most dangerous, because it causes people to hold stocks into the ground. A stock price reflects the value of a company based on the company’s earnings, cash flows, and growth — mixed in with a lot of investor sentiment.
Investors that plan to wait until they’re “back to even” are letting loss avoidance win. Remember, the stock doesn’t know that you own it. All that matters is the future of the company.
Evaluate your investment decisions in the present, and determine your opinion about each stock’s future. Sell the losers, and add to the winners.
By understanding how these common myths lead investors astray, you can make better investment decisions for the future. Invest in strong long-term companies with a buy-and-hold strategy, and evaluate your investment decisions with an unbiased lens.
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David Smith owns shares of Alphabet (C shares). Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool owns shares of and recommends Alphabet (A shares) and Alphabet (C shares). The Motley Fool has a disclosure policy.