Investing is complicated. It takes an expert to truly understand the best investment strategy for any individual with any amount of capital, but ‘get rich quick’ schemes and online guides have attempted to muddy the waters. As a result, there are plenty of self-contradicting myths circulating.
This fact, in itself, is enough to put people off the idea of making investments for good. But the world of investment doesn’t have to be a confusing one. If you can stamp a great big ‘DEBUNKED’ onto these myths, then the stress and uncertainty of navigating the market should be greatly reduced, and that’s exactly what we’re here to do.
To help you out before you start your journey, below are 5 of the most common myths about investing, as well as a few tips on how to make the most out of the investment landscape as a beginner.
Number One: Investing is for the Experts
The first – and perhaps the biggest – myth we want to debunk is the notion that you should be an expert if you’re going to step into the stock market. True, investing is intimidating if you’ve never done it before but, with the right guidance from an experienced advisor, you can circumvent those years of theoretical and practical learning it takes to make a true expert.
According to a report in 2023, it was found that there were 27 million Brits who have invested which is around 42% of the population. 5% of those Brits only started investing in 2021, so what happened in 2020? Did they all become experts overnight? Not by any means. It’s likely that the disruption of the coronavirus epidemic prompted many to turn to the experts rather than going at it alone.
You don’t have to be an expert to invest, and you don’t have to be an expert to see a high ROI. What you do need, however, is expert guidance tailored to your situation, risk level, and future goals. Without that, you’re making a very long shot in a very dark room.
Number Two: Investing Close to Home is Safer
As a seasoned financial advisor in Bristol, we can name a load of avenues in Bristol that are worth investing in, but that doesn’t mean they’re ‘safe’ investments. When you’re investing in stocks, properties, or other selected asset classes, you can minimise your risks by undertaking certain strategies, but you cannot eliminate risk altogether.
Countries and counties face the same level of risk as any asset class, so investing in a single city – like Bristol, for instance – is less safe than spreading out your portfolio.
Just look at China. Due to its economic boom in March 2021 – during which, the total GDP reached around 114 trillion yuan and total fixed asset investment increased by nearly 5%– the amount of investment went through the roof. Fast-forward two years, and investors have become cautious, entirely changing their minds about China being super-investable.
The same was true for the UK as a whole in 2016, with the Brexit vote leading to an investment exodus. This ‘chilling’ of the UK market still affects the country now. Business investment, for instance, is only 6% higher than it was in Q2 of 2016 which is equivalent to less than 1% per year. In the same amount of time, US business investment has risen by over 25%. Investing in a home market is no guarantee of success, and in fact, it could harm your chances of building a strong portfolio.
Number Three: Gold is a Surefire Way to Protect Against Inflation
This myth has been around for a while, but it is exactly that: a myth. While gold has been one of the most popular ways to store wealth over the last few thousand years, it does not offer a complete shield against inflation.
For starters, making any kind of investment that is based on fear is a bad way to start. If you understand where it fits in your portfolio, and strategically allocate it into your overall financial plan, then you can undoubtedly benefit from it as one of your main asset classes. But if you are investing in gold simply to protect yourself from volatile and stressful times in the market, then it might come back to bite you.
Let’s get one thing straight: gold can be affected by inflation in the same way any other asset can be affected. Other factors, too, can cause significant movement. A gold investment would have lost money from 1980 to 2001, for instance. This is because, during the 1980s and throughout the 1990s, the world economy was booming, and investors’ optimism for the future was at an all-time high. This subsequently led to a decrease in the demand for gold as a ‘safe’ investment.
Add to this that gold is not actually a yielding asset, which means it doesn’t pay dividends. Between 1988 and 1991, when inflation was high, gold lost around 24% in value– even more than the US dollar, which lost 17%. In this way, while gold can be a great asset in a diverse portfolio, smart equity investment can offer just as much protection, coupled with a better hedge.
This is why a financial advisor for the stock market can be so useful. While gold can protect against inflation, that isn’t the whole story, and navigating the complexity of the metals asset class can be very difficult – especially when it comes to risk, taxes, and cash flow.
Number Four: The More You Own in Your Portfolio, the Better Off You’ll Be
When discussing investment strategies, we talk a lot about portfolios, and how useful they can be to minimise risk. While this is true, owning a lot of stock or funds doesn’t mean your portfolio is diversified. It could even be a bad thing.
Say you owned multiple stocks in the tech industry, and you bought a lot of them in 2021. One year later, tech stocks fell by more than 30%. Of course, the stock market fell too – with higher interest rates, inflation, and the unstable economic climate being the contributing factors – but tech stocks ended up falling a whole 10% more than the overall market drop of 20%.
If you had a portfolio of around 20 different tech market stocks, then they all would have behaved in the same way. If you had a portfolio of stocks that were rooted in alternate sectors, however, each would have behaved differently, and that would have protected you from completely losing out.
To own a diversified portfolio isn’t to own a heavy portfolio. To be properly diversified, you need to hold assets that aren’t intrinsically correlated, meaning they will behave in different ways according to the specific market environments that they find themselves in.
Number Five: Intuition is Just as Powerful as Strategy
This last one is a real kicker. Over the last few decades, some unseasoned investors have found a lot of success in the market. Many have even made out like bandits. But the problem with continued success is that it makes it easy to believe that ‘intuition for the market’ is one of your greatest assets. If you make it through difficult times – of which there have been many over the last 50 years – then it’s easy to think there’s a certain amount of luck contributing to your decisions. You might even advise other investors of the same thought.
While all of this is perfectly acceptable – instinct is, of course, a good trait to have when investing – it has worked to skew the perspective of many new investors, making them believe that passion investing and instinct are just as powerful as strategy. This is 100% false.
Let’s look at the definition of intuition for a moment: ‘the ability to understand something without the need for conscious reasoning’. Now let’s look at the definition of strategy: ‘a plan of action to achieve a long-term or overall goal’. Which one of these would you rather rely on when entering a complex and volatile stock market?
Of course it’s going to be strategy, because intuition is not a tangible or reliable thing. In fact, it can even be damaging. If markets drop, then everyone’s intuition would tell them to hightail it the other way. If markets rally, then everyone’s intuition would tell them to buy more. But this kind of behaviour is the exact opposite of how people should invest, as it follows a principle of ‘selling low and buying high’.
In many ways, it can be argued that the concept of intuition is a myth in itself! But strategising isn’t a myth. If you have a clear investment strategy that is built around a solid portfolio, reflecting your risk tolerance and your management skills, then you have a far better chance of navigating the market successfully. Once again, this is why financial advisors are so useful, as we work to put strategy first and put all our energy into reliable, researched management. And we also help to debunk these kinds of myths while we’re at it!
Risk Warning: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
