There are a plethora of misconceptions and preconceived ideas that prevent investing beginners from investing into the share markets. This article will debunk 6 of the more common.
1) You need a lot of money to start investing
Probably the most common misconception people have about investing is that they need to start with a large sum of cash. In reality, it’s possible to begin investing into shares and managed funds with as little as $1,000. Possibly a more pertinent consideration for new investors is whether they have enough surplus cash flow.
When you make the decision to begin investing, the initial purchase of investments should only be the start. Everyone’s situation will be different, however for the majority of people, implementing a dollar cost averaging strategy can ensure longer term success. This is where additional investment purchases are made on a consistent basis regardless of the investment price, rather than trying to guess if the market will go up or down.
2) Shares are too risky and volatile
If your investment timeframe (how long you plan to keep the shares) is less than 2 years, this statement is probably accurate. However, for those with a longer term timeframe (greater than 7 years) the short term volatility of shares should not deter you from investing.
Volatility in share markets exists due to the fact that shares are traded on an open stock market, where people can buy and sell shares at whatever price they believe to be fair value. Although the price fluctuations seem daunting, they actually provide greater opportunity to dollar cost average, as mentioned above.
Over time, the stock market has shown to trend upwards, as global economies continue to expand. Subject to any cataclysmic disruption to the global financial system, history shows this trend continues and volatility is part of the process.
An important tool used to reduce risk and volatility associated with individual shares, is diversification. Holding a diversified portfolio of shares assists investors to lower risks specific to markets, industries, sectors and companies themselves, thereby increasing the likelihood of long-term capital growth.
3) It’s too hard to know what to buy
This is a common problem for a lot of new investors. Often the first shares purchased by a new investor is from something overheard at a BBQ, where a friend of a friend knows a guy that works somewhere, who says the company is about to take off. Unfortunately these ‘hot tips’ seldom work out and can turn a lot of people away from wanting to invest.
Fortunately, there are alternative options to random stock picking. One option is to seek out a professional stockbroker, where you can receive specific share recommendations for a brokerage fee. A stockbroker’s advice is generally very narrow and unlikely to take into consideration your overall goals and objectives.
Alternatively, a financial adviser will be able to provide investment advice in addition to reviewing your overall position from a holistic perspective. This can include, but not limited to achieving your goals around wealth building, cash flow management, superannuation and retirement planning, insurance and asset protection.
4) Investing is time consuming
Depending on your individual strategy, this could be true. Some investors will manually buy and sell their shares or managed funds. Researching companies and finding the ‘right’ stocks to buy can also be time consuming.
In addition, investment income is generally taxable income and therefore, it needs to be accounted for in a tax return. If you have a portfolio of shares, you will need to monitor the dividends received throughout the year. Financial advisers have access to administration platforms that can facilitate dollar cost average strategies as well as monitor the tax-related consequences of investing, such as capital gains when an investment is sold, as well as dividends and distributions. These platforms come with a cost, however they can save an enormous amount of time for investors.
In addition, using a financial adviser can provide peace of mind, knowing that a professional is managing your money and ensuring funds are being appropriately invested.
5) Sell when the market goes down
One of the most important things an investor needs to learn is the difference between investing and trading. If you have a long-term time frame, short-term fluctuations should not have any bearing on your investment strategy. When markets turn negative, the emotion of fear starts to impact retail investors and a strong desire to sell generally follows. And when retail investors start to sell, it can catapult the market to even lower levels.
However, every bear market is followed by a bull market. When the price goes down, it further benefits those with a dollar cost averaging strategy, as they can purchase more investments at cheaper prices. Even the most experienced traders know that it’s nearly impossible to sell at the top and buy at the bottom with any consistency. Most investors who attempt to do this will miss out on some of the best days in the market, which can have an enormous impact on your overall returns.
The following table demonstrates how a $10,000 initial investment performed over 20 years, between 4 January 1999 and 31 December 2018, if you had stayed invested, or missed some of the best days in the market.
|January 4, 1999 to December 31, 2018||Dollar value||Annualised performance|
|Fully invested (S&P 500 index)||$29,845||5.62%|
|Missed 10 best days||$14,895||2.01%|
|Missed 20 best days||$9,359||-0.33%|
|Missed 30 best days||$6,213||-2.35%|
|Missed 40 best days||$4,241||-4.20%|
|Missed 50 best days||$2,985||-5.87%|
|Missed 60 best days||$2,144||-7.41%|
If you miss the 20 best days in the market over a 20 year period, not only do you miss out on gains, you will actually see your initial investment be eroded over time. It’s therefore vital to maintain a long-term view when investing and not be swayed by your emotions.
6) The experts know best
This may be a strange thing to confess as a financial adviser, however it needs to be said. We cannot predict what will happen in the market. Furthermore, anyone who claims to know is either hedging their bets or trying to sell you something. You may hear stories about an expert economist who predicted the global financial crisis, the tech bubble or the covid crash. The problem is, you never hear about the predictions they get wrong.
There is always someone making a claim about what may or may not happen and eventually, someone will be right. With that being said, financial advisers can help construct a portfolio of investments covering different sectors of the market to withstand varying degrees of volatility, so that you can achieve your individual goals and objectives. This is diversification and it is an integral part of investing.
If you would like help building your own portfolio or discussing what investment options may be right for you, call 1300 376 376 or book in for a complimentary no-obligation initial consultation with a Private Wealth Consultant.
Disclaimer: * The information contained in this site is general and is not intended to serve as advice as your personal circumstances have not been considered. DPM Financial Services Group recommends you obtain personal advice concerning specific matters before making a decision.