5 investing myths debunked
There are so many misconceptions about investing and financial markets in general. Often, these commonly held investing beliefs – myths – prevent some people from benefiting from stock market investing.
In this article, we take a deep dive into five common investing myths to show you why often the prevailing “wisdom” isn’t very wise at all.
Myth #1: I need a lot of money to invest
Nothing could be further from the truth. Investing isn’t just for the rich or for brokers; it’s for everyone. Many people delay their start at investing because they believe they need a significant amount to invest. It’s not true. Why wait until you have $10,000 or $20,000 saved up to start investing? Start now, with $100 or $200 a week or a month, and get trading sooner.
You really don’t need a lot of money to invest. You can invest a little at a time. The key is to get started and to invest regularly.
You might want to consider making use of some of the automated tools available to help you maximize your investing. They can help you make more of small amounts over time.
- Automatic contributions/deposits. Most accounts allow you set up a regular deposit, whereby you automatically transfer a specific amount from your chequing account to your investing account (weekly, bi-weekly, monthly, etc.). You could set it up to coincide with your payday, and then you don’t have to think about it. Accumulate cash in your investing account and be ready to make an investment trade/purchase.
- Systematic contributions. Similar to the above, this type of plan lets you purchase small amounts of mutual fund units directly with each regular, automated transfer.
- Dividend reinvestment plans (DRIP). These programs allow you to automatically reinvest the cash dividends received from your investment to purchase more shares. You benefit from compounding returns over time, and you accumulate more shares.
Myth #2: Investing is too risky
Certainly, there are some risks to investing. When you invest in a company’s stock, the value fluctuates. And there is always a risk – however small – that the company could fail and render your investment worthless. But this is the exception rather than the rule. And there are strategies you can employ to reduce your overall risk when investing.
- ·Have an investing strategy. You’ll want to tailor your investments to suit your situation and goals, your investment time horizon (how long you have to invest) and to your personal risk tolerance (how much risk you’re comfortable with). Make investment choices with these things in mind and stick to it.
- Diversify. This is really all about not putting all your eggs in one basket. The key is to diversify your investments across industries, geographic regions and asset classes. When you concentrate your portfolio in the same sector or industry, if that sector performs poorly, so will your entire portfolio. Diversification tends to balance out your level of risk. When one region or sector performs poorly, other regions or sectors may be performing well.
- Focus on time in the market and not timing the market. Historically speaking, investing over the long-term has been more successful than short-term stock picks. While the value of stocks and other investments often fluctuate significantly in the short term, values are much more stable over time. Ever heard “slow and steady wins the race”? You’re more likely to be successful in the long term if you invest regularly and stay invested.
- Do your research. When choosing your investments, take the time to research the company you’re investing in, to review its financials and creditworthiness. Qtraders have access to fundamental research (all the key performance metrics, including the latest financial statements) through the Qtrade platform, as well as analysts’ recommendations, which provide well-researched reviews and stock picks. The more you know about your investment, the more confident you’ll be in your choice.
Myth #3: I don’t have time to invest
As a do-it-yourself investor, you do need to take a bit of time to do research and choose your investments. Neither you nor anyone else can predict market performance, so set your investing goals and stay calm. The more you check the movements of financial markets, the more you may be tempted to take action (like selling your stock) that could cost you. Check in on your investments on a regular basis – quarterly, or once or twice a year – but stick to your long-term investment plan.
Take advantage of time-savers. If you don’t have the time to do your own research on stocks, you can still have exposure to the market with newer options that make choosing investments more time efficient:
- Think about an “asset allocation” or “all-in-one” exchange traded fund (ETF) for your investing. All-in-one ETFs are generally made up of several underlying ETFs, providing a high level of diversification – across asset types, geographies and industry sectors – in one single investment. Better yet, they’re automatically rebalanced depending on market conditions, which makes for simplified investing.
- Look at index investing – These are ETFs and mutual funds that are designed to follow a benchmark stock or bond index, such as the S&P/TSX Composite Index (representing Canadian equities) or the S&P 500 Index (representing U.S. equities). Index funds purchase the same components (stocks or bonds) that make up the index, which gives you a more diversified portfolio without having to purchase the individual stocks yourself.
- Consider using Qtrade Guided Portfolios, an online service that helps you invest based on your financial goals. You simply complete the online questionnaire about your investment time horizon, goals and comfort with risk, and the service creates a portfolio suited to your needs. These portfolios are rebalanced on a regular basis depending on market conditions and performance – the asset allocation and ongoing portfolio reassessment is done for you. Every time you make a deposit to that account, it is automatically invested in your portfolio.
Myth #4: I’m too young or too old to invest
There is no “right” age to invest. However, your investing strategy will be based on your financial needs and goals, your tolerance to risk, and the time horizon of your investments – which obviously change over time.
You can start investing as early as your teen years! In most Canadian provinces, the minimum age you need to be to open a brokerage account is 18, which allows you to buy and sell mutual funds, ETFs, stocks and bonds. You can start investing in a tax-free savings account (TFSA) at 18 years old as well. For registered retirement savings plans (RRSPs), there isn’t a minimum age, but contribution rules are based on your earned income, so you need to be filing an annual tax return to qualify. You could even contribute to your own registered education savings plan (RESP), particularly if your parents haven’t topped up contributions to earn free money via the Canada Education Savings Grant.
In fact, starting to invest when you’re young can be more beneficial to your overall returns because you have more time to accumulate funds, and more time to ride out market swings. You also gain the benefit of compounding over the long term, where you re-invest your returns (interest, dividends) back into your portfolio, which helps it grow faster.
For older Canadians, investing during retirement is both possible and recommended – provided you have adequate funds for your day-to-day needs and have built up an emergency fund. It’s just a matter of ensuring your investing strategy aligns with your situation and financial goals. Obviously, a 65-year-old new retiree needs a different strategy from a 40-year-old who is saving for retirement and their child’s education. Some believe it’s too risky to invest later in life, but if you keep everything in cash or a savings account, you’ll likely lose some purchasing power to inflation. As the cost of living rises, your cash may not keep up.
Myth #5: I need to time the market to be successful
This couldn’t be further from the truth. Ultimately, everyone wants to buy a stock when its price is low and sell it when its price is high. That’s how you make money in the stock market. But it’s pretty much impossible to time the market, even for seasoned professionals. You might get lucky on the timing of a trade or two. But long-term investing has historically been more successful than short-term stock picks.
What you need is an investing strategy that doesn’t require you to time your trades or predict when a stock price will go up or down. One that delivers consistent returns regardless of timing. Trying to time the market can lead you to lose out:
- If you wait to buy that stock until its price comes down, you might wait forever. In the meantime, you’re losing out on dividends and stock price increases.
- Frequent trades can lead to extra fees, which will eat away at your returns.
Rather than focusing on timing the market, switch your efforts to time IN the market.
The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters.
Qtrade Guided Portfolios is a trade name of Credential Qtrade Securities Inc.