Investing is a sector overrun by fanciful tales masquerading as facts. Since just about anyone can become an investor, misleading notions about it can easily arise. If you want to be a serious investor, then you need to be able to think logically. Here is a list of prevalent myths about the investment sector that newcomers should be aware of:
Stock Investments Generate Returns Based on Chance
Some people think investing is like gambling. You buy stock and calculate the chances of the price going up or down in value. Actually, this is not how investors assess risk and reward. It’s less about probability and more about the business factors. A company’s ability to generate revenue predicts stock prices much more than probability.
Even day trading is less about chance and more about having the skill to distinguish the best stocks to buy based on factors such as user growth, balance sheets, and company debt, among others. So don’t enter the stock market as you would a casino in Las Vegas. Your odds are not down to pure chance, but your ability to do research and educate yourself.
People Need to be Already Rich to Invest
You may hear more about rich investors in the news, but not all investors start out rich. In fact, you could start investing with less than $100. Buying penny stocks, peer-to-peer lending, putting a dollar in a savings account, or sending a crowdfunding donation are all forms of investing. You don’t need a trust fund to start investing using these methods. It’s the small investments that can stack up and make you richer. Therefore, don’t be discouraged if you don’t have a whole lot of money as starting capital.
Investing will Make You Rich
Sensible investing does make people rich in the long-term, but don’t expect that to happen overnight. You won’t be able to buy penny stock today and become a millionaire the following week. It’s easy to get your hopes up when you hear stories of people who invest thousands of dollars and earn millions in a handful of years, but as mentioned above, investing is not gambling. If you are new to the world of finance, it will be slow progress until you can start earning big bucks.
Diversification is Key to Success
You will hear this a lot from investment advisors: diversification is crucial. Yes, an investment portfolio should be diversified to mitigate risk and optimize returns, however, the diversification should be reasonable to generate returns and minimize risk. Some investors end up over diversifying following this often repeated mantra.
If you are a new investor, you may not need to rush to diversify your assets. According to Warren Buffet, investors should diversify at low cost on assets like index funds. If you don’t know your asset classes, you will never get diversification done the right way.
When in Doubt, Follow the Trend
This is exactly what you shouldn’t do when you invest. Never follow the herd, or the latest trend, without understanding why. Following so-called hot stocks or assets is how people get scammed by pump and dump schemes. Therefore, be very careful when it comes to hyped up assets. Spend time trying to understand why a certain asset is suddenly going up in value. Vigilance would put you at lesser risk for fraud and increase your chances of succeeding.
Mind the above misconceptions when you start out as an investor. Be informed so you don’t end up making mistakes you’ll regret later.