Investing is not black magic — but among many people, it certainly has that reputation. With so many moving parts and unpredictable possibilities, it's not surprising that investing myths are common. Many people fall prey to these common misconceptions, passing down secondhand knowledge that may confuse potential investors or discourage them from investing at all.
However, things are not always as they seem. Learn the truth about some of the most common investment myths, and challenge your existing investment education.
Myth 1: You Need a Lot of Money to Invest
One of the biggest excuses people make for not investing is a lack of funds. When they think of investors, they imagine high-powered Wall Street types with millions of dollars at their disposal. But anyone can invest! Many investment firms have small minimum requirements or none at all. Some people even use mobile apps to invest both small and large amounts — sometimes even spare change.
Myth 2: Past Performance Guarantees Future Returns
Contrary to popular belief, a fund or stock doing well in the past is no indicator that it will do well in the future. There are no sure things in investing.
If you bought $1,000 worth of stock from any of the (now) successful Silicon Valley startups in the 1990s, for example, your initial investment would now be worth a considerable amount. But this doesn't necessarily mean you'll be rich in 20 years if you buy $1,000 worth of the same stock today. Successful investing is about a fluid approach to market volatility — and understanding the risks involved.
Myth 3: A 401(k) Is the Only Way to Save for Retirement
While 401(k)s and other employer-based retirement plans are popular, they're not the only vehicles you can use to save for retirement. Individual retirement accounts (IRAs) are one option if you don't have access to a 401(k). While IRA contribution limits are much lower than limits for 401(k)s, you can still invest up to $5,500 a year — or $6,500 if you're 50 or older — according to the Internal Revenue Service (IRS).
There are two primary types of IRAs: Roth and traditional. Retirees can withdraw money from a Roth IRA without paying taxes on the distributions, while traditional IRAs allow you to deduct your current eligible contributions on your taxes, letting you claim a smaller income. You'll pay taxes when you're retired and ready to withdraw with traditional IRAs, and there are requirements that must be met to withdraw tax-free from a Roth IRA. Note that there are additional limitations and requirements for each type of IRA, according to the Internal Revenue Service (IRS).
Myth 4: Investing Is Gambling
Because there are no guarantees in investing, some people compare it to gambling. With gambling, you're taking an uncalculated risk when you pull a lever on a slot machine.
There are many unknowns and risks involved in investing. But when you choose to invest, you're making a calculated decision based on your understanding of those factors.
Myth 5: Investing in Individual Stocks Is Best
Every day, there's a new hot stock on the market. While these stocks garner substantial media attention, they're not necessarily worth your consideration.
Don't put all your eggs in one basket — you may be familiar with this age-old saying. Many successful investors take its message to heart by diversifying their portfolios and spreading out their investments over a variety of stocks. Of course, there are always risks involved with investing. But by choosing only one stock to invest in, you could leave yourself open to losing everything if the company goes under.
At the end of the day, what's important is not how much money you have, but that you don't let myths and misinformation stop you from taking advantage of the benefits smart investing has to offer.
Individual Retirement Accounts (IRA)