Lachlan Brown* says myths and legends permeate much of our culture, and the world of financial investments is no exception.
Much like the fables and folklore Adam Savage and Jamie Hyneman would put to the test every week on Mythbusters, the world of financial investments has its own myths.
While believing in investing myths may not physically damage you like dipping your hand into molten lead (Mythbusters ep. 136, 2003), it may cause significant financial damage to you.
In this blog we are taking on the role of Savage and Hyneman, striving to derive fact from fiction, and busting the myths that are harming today’s investors.
Myth #1: It’s better to time the market
We are starting with arguably the biggest and most damaging investing myth of all: timing the market.
Simply put, timing the market involves buying shares when the markets are low and selling shares when the markets are high.
Investors do this in an attempt to maximise their profits.
This is much easier said than done, in fact, it is almost impossible to do perfectly.
Very few investment professionals recommend ‘timing the market’ as an effective strategy, particularly considering investing in shares comes with the risk of losing some or all of your initial capital investment.
But knowing that doesn’t make it any easier to ignore the itch to try and buy high and sell low, even if you don’t have any idea of when high is high or when low is low.
Yes, there may be a chance that you are selling out of the shares at the perfect time before the fall in the market, but the odds are heavily against you.
Arguably, the more admirable and desirable skill is being able to buy and hold shares over the medium to long term.
If you’d like to take some cues from the greatest investor of all time; Warren Buffett says “our favourite holding period is forever”.
And an age-old investing adage is; it’s not about timing the market, but time in the market.
BUSTED
Myth #2: Investing is just like gambling
The only thing investing and gambling have in common is risk, including the risk of losing some or all of your initial capital investment.
The level of risk associated with each activity is what busts this myth.
While you could say that investing in riskier or more complex investments is similar to gambling, gaining exposure to the share market for the vast majority of people involves trying to maximise their returns for an individually acceptable level of risk.
In most cases, investors calculate how to generate a return with as much certainty as possible, although 100 per cent certainty is not possible with any investment.
On the other hand, some gamblers would arguably do the same however many are more interested in the size of the potential return than the probability of success.
To add to this, investing, unlike gambling, is an activity where all investors are able to share the same or similar rates of return when investing in the same instrument.
This means that just because some investors generate a return does not mean that other investors have to suffer a loss.
By comparison, gambling requires a winner and a loser as it is impossible for everyone to win.
BUSTED
Myth #3 You have plenty of time to start investing
If there was a secret recipe to maximising your investment returns, it would include one key ingredient: Time.
The earlier you decide to get exposure to the market and start investing, the better.
This is because compounding does a fair amount of the work over the years, lifting your portfolio’s value as it collects dividends and interest, and hopefully increases in value.
For example, say you start with a $200 initial deposit and save $50 a week in an investment account which earns an average of two per cent interest compounding annually, you’ll have $105,839 in 30 years.
As we like to say at Spaceship, the best time to start investing was 20 years ago; the second best time is now.
BUSTED
Myth #4 You need a lot of money to invest
This is 100 per cent false, with Spaceship Voyager there is no minimum investment so you can get started with just $5 if you like.
BUSTED
*Lachlan Brown is a contributor at Spaceship.
This article first appeared at spaceship.com.au.
