Many people are undecided about whether or not to invest in stocks. Instead of naively adopting prevalent beliefs, it’s critical to have a thorough grasp of stocks and trading before deciding to invest.
Investing myths generally begin when someone makes an accurate observation. However, it is possible that it is only accurate for a limited time period. Alternatively, it might only be true in a specific environment or market. Furthermore, once something has gained market acceptance, it is likely to be discounted into pricing to some extent. The axiom is becoming obsolete as the market adapts to meet a notion.
The more simple and appealing an investment myth is, the more it spreads. Whether or if they are credible has little bearing on how broadly they are believed. Whether consciously or not, the investing sector and financial media contribute to the spread of investment myths.
1) Stock investing is similar to gambling.
Wall Street might appear to be a casino to the untrained eye. This is one of the investing fallacies that is easily debunked. In reality, if you approach investing as if it were gambling, the market becomes a casino. However, if you approach investing in a systematic manner, you can increase your chances of success.
You can reduce losses and ride winning trades if you utilize established investment methods and manage portfolio risk. You have control over how much risk you accept and when you acquire and sell investments as an investor. The market doesn’t have to be a casino if you have patience and a strategy.
2) You should invest in gold if you want to be safe.
Investing in gold has the potential to be highly appealing. Gold is the go-to asset when it comes to secure investing. It’s commonly marketed as an investment based on skepticism of central banks. The gold investing thesis is based on the belief that “money printing” will cause fiat currencies to lose value. Even if this is correct, the thesis is incorrect. The majority of individuals invest their long-term savings in stocks and other assets rather than fiat money.
When gold is included in a stock market portfolio, it may act as a stabilizing factor. And, while investing in gold is unlikely to result in a loss, it does not guarantee a profit. Gold does not pay interest or dividends, and its value does not rise over time.
3) Stocks that go up must eventually fall.
The stock market is not bound by physical laws, and there is no gravity to drag shares back to parity. Over 20 years ago, the stock price of Berkshire Hathaway rose from $7,455 to $17,250 per share in just over five years. In February 2020, instead of decreasing, the price rose to almost $344,000 per share. Although it is false to assert that stocks never undergo a correction, the assumption is that the stock price reflects the firm. There’s no reason why the stock of a terrific firm run by excellent executives shouldn’t keep rising.
4) Companies with a solid reputation make smart investments.
Stocks of firms you like and respect are also recommended by market experts. Warren Buffett has stated that he does not invest in firms that he does not fully comprehend. True, he’s made a lot of money from firms like Coca-Cola, and he’s now an Apple investor. However, the majority of his assets are in uninteresting businesses such as insurers and furniture makers.
5) Buy low and sell high.
Obviously, you should be able to earn if you can purchase low and sell high. This isn’t the only method to generate money, either. Indeed, it is frequently discovered that purchasing high and selling high is more profitable.
When equities are believed to be expensive yet continue to rise despite this, some of the highest gains are achieved. If you wait for equities to fall in price when this happens, you may lose out on a large amount of the bull market. If you’re a value investor or want to purchase and keep a company, you’ll want to buy low. However, momentum and growth investing may necessitate purchasing companies near their all-time highs.
6) Stay away from volatility and risk.
Investing implies risk, and it’s logical that investors should avoid it. The fact is that taking risks pays off for investors. Avoiding risk by selling your investments whenever you suspect a bear market is coming will reduce your long-term gains. It’s tough to time the entire market, and you’ll almost certainly sell too soon and too often. As a result, your returns will be hampered.
Using asset allocation to disperse risk is the proper strategy to manage portfolio risk. Most of your investments will be risky, but if you diversify over numerous asset classes and within each asset class, the losses from one investment may outweigh the losses from the others. Diversification allows you to acquire certain riskier assets that can produce high returns without jeopardizing the rest of your portfolio. Risk should be accepted, but it should also be controlled.
7) The best stock to purchase is a blue chip stock.
Blue chip stocks are those that have a proven track record, a strong brand, and manageable margins. There’s nothing wrong with buying a couple of these stocks, but they aren’t the most effective way to build wealth. The difficulty is that blue chips are typically appropriately priced since their earnings are predictable. They seldom trade below fair value because enormous funds rush in to acquire them as soon as they do. As a result, while returns are consistent, they seldom outperform the market.
Although blue chip stocks have a strong track record, nothing lasts forever. The Dow Jones Industrial Average (DJIA) is a stock market indicator that measures the performance of blue-chip businesses. Only two of the index’s initial members, General Electric and Dupont, were still present in 2018. Both have now been deleted. If you just purchase blue chips, you’ll never have the opportunity to invest in stocks like Amazon and Google before they enter their most exciting growth periods.
8) It’s better to have some knowledge than none at all.
Knowing something is always preferable to knowing nothing, but in the stock market, it is critical that individual investors understand what they are doing with their money. Successful investors are those who do their homework. Don’t be that person who would FOMO (Fear of missing out) over an overhyped stock.
An investor who does not have the time to conduct comprehensive study should consider hiring an advisor. Investing in something you don’t completely understand is significantly more expensive than hiring an investment advisor.
9) You must be updated with Financial News.
Your investing choices and portfolio approach should be based on your life and investment objectives, not on what’s going on in the markets on any given day.
Understanding certain investing fundamentals will help you put market occurrences in context and make you feel more at ease as an investor. Keep in mind that much of what you hear in the news is merely noise, and ignoring it won’t hurt your profits. Rather than making decisions based on market conditions at any particular time, ask yourself, “What combination of assets am I comfortable with, given the time I have to attain my goal?” If you’re unsure, studying more about asset allocation and diversification might assist you in making a decision.
10) Past performance ensures future profits.
Contrary to common assumption, historical performance of a fund or stock does not guarantee future performance. There are no guarantees when it comes to investing.
If you had invested $1,000 in any of the (now) successful Silicon Valley businesses in the 1990s, your initial investment would today be worth a significant sum. However, just because you buy $1,000 worth of stock now doesn’t imply you’ll be wealthy in 20 years. It takes a flexible approach to market volatility — and a thorough awareness of the dangers involved — to be a successful investor.
These are just a handful of the numerous investment misconceptions that have propagated throughout the investing industry. You should be skeptical of any strategies or approaches that are deemed absolute in general. Prudent risk management and the odd contrarian bet or measured risk are required for successful investment. There is no such thing as a holy grail, and investment is rarely reduced to a set of basic principles. It takes a lot of time and effort to be a successful investor. Think of a partially informed investor as a partially informed surgeon—their financial health might be jeopardized if they make mistakes. At The Profit Room we don’t chat, we trade and we encourage you to take advantage of our premium trading, investing and futures courses to learn the strategies that investors on and off wall street use everyday to make money and build wealth. We encourage you to learn for yourself so that you can make the best decisions possible for you.
