By Barbara O’Neill, Ph.D., CFP®, AFC® [email protected]
Investing is a frequent topic that Personal Financial Managers (PFMs) get questions about. Whether questions relate to Thrift Savings Plan (TSP) asset allocation decisions or investments made into IRAs or taxable accounts, service members typically have much to learn, and may also have to “unlearn” some investing misinformation.
Below are six investment myths that were discussed in a Next Gen Personal Finance (NGPF) webinar for financial educators called Myths and Misconceptions About Investing. Each myth, or “trick,” is presented below, along with correct information, “truth,” about each investment topic:
You Have to Have Lots of Money to Invest
The truth is that it has never been easier to be a “small investor.” For as little as $5, someone can buy fractional shares of stock through a wide variety of sources. A fractional share is just as the name implies: the purchase of less than a whole share of stock for a small dollar amount.
Past Performance is Indicative of Future Returns
The truth is that academic research has found that the over-performance of individual stocks or mutual funds can mostly be attributed to luck. There is little- if any- relationship between high past returns and high future returns.
I Can Do Better Picking a Stock Than Just Investing in an Index Fund
The truth is that, on average, actively managed fund managers consistently underperform benchmark market indexes. One reason is that they have significantly higher fees than index funds that track various indexes such as the Standard & Poor’s (S&P) 500.
The Stock Market is Rigged and Most People Lose Money
The truth is that the stock market has been up (i.e., positive returns) about 70% of the time between 1926 and 2020. Contrary to misconceptions by some, it is not like a casino where “the house always wins.”
You Need a Finance Degree to Be a Successful Investor
The truth is that successful investing does not have to be hard or require specialized education. Two time-tested investing strategies that anyone can follow are to make regular deposits into a low-cost stock index fund and to start early and invest over many decades of life up to and through retirement.
Timing the Market is Easy
The truth is that market timing is very difficult because investors need to be right twice: when they get out of the market and when they get back in. Even market professionals typically do not do it well and often miss big rallies that follow sharp declines.
Photo by Kristina Paukshtite