Investing myths stem from observations that could have been an accurate assessment at some point. It could have been a ‘one-off’ occasion and possible in a specific market scenario.
If the market accepts these myths as beliefs, it can lead to misconceptions that have little merit.
Let’s Look At The Top 7 Investing Myths And Get A Perspective On Each One Of Them.
1. Investing in Stocks is like Gambling in a Casino
It’s imperative to compare the two concepts of gambling and investing in the stock market to dispel this myth.
Both involve putting in the money based on chance. There are varying degrees of risk involved in gambling and investing in stocks. Lastly, there exists an element of uncertainty of a win or a loss.
While similarities exist, you can approach stock market investing with a systematic plan, which is impossible when you gamble in a casino. From a risk perspective, the investor can choose the level of risk that suits their appetite when investing in stocks. Again, impossible in a gambling scenario.
2. Success Comes with Picking the ‘Right’ Stock
Prospective investors in stock markets tend to remain on the fence as they believe that you need to be great at picking the right stocks that will deliver long-term returns. This myth adds undue importance to multi-baggers that are exceptions rather than the rule.
Build a portfolio of the stocks that suit your long-term financial interests and risk appetite. Instead of cherry-picking, you must focus on researching the company fundamentals, balance sheets, performance, and more to establish if the business is worth the investment.
3. Invest Only When the Time Is Right
Even the most experienced market analysts cannot accurately predict how the market will behave or react. At best, it is a guesstimate. Therefore, the myth around investing only when the time is right to be successful holds little ground.
Timing can benefit investors, but only because of luck or chance. Trading in and out of the market all the time is riskier as it may impact your overall earnings. For long-term investors, it is best to use a planned approach instead of waiting for the market to correct itself.
4. The More Stocks You Own, the More Diversified Your Portfolio Will Be
This myth is true to some extent and in the correct context. You must know about correlated and different stocks to achieve the right balance for a diversified portfolio.
For example, if you have a portfolio of energy stocks, it is not a diversified portfolio as these shares would behave similarly. But when the shares are diverse, they may move in two different directions. So, if the energy sector is down and the high-growth tech sector is doing well, you can minimize your losses.
Buying stocks randomly across sectors cannot be termed portfolio diversification. Spread your investment across several asset classes like stocks, bonds, gold, and real estate to diversify.
5. Only Invest in Blue Chip Stocks
Blue chip stocks are the crème de la crème of the share world. These are companies with strong fundamentals and a track record of consistent performance across a significant period of time.
Generally, these are high value shares and there is nothing wrong with owning a few of them. They are great in times of market volatility as they have the means to weather through the worst economic downturns.
That said, owning blue chip stocks cannot accelerate wealth creation for you. The issue with blue-chip stocks is that the earnings remain fairly predictable and offer steady returns. If you are looking for some high returns, you must explore small cap and midcap stocks that have better growth prospects in the short and long term.
6. Sell Away When the Market Is in Trouble.
The general misconception is to go on a selling spree if the market falls. It is more about emotional reactions instead of a well-thought strategy.
People who fall victim to this belief may perhaps be able to cut down their losses in the short term. However, when the markets bounce back, you may buy the same shares at a premium price. In the process, you miss out on some quick gains.
As experts suggest, it is best to hold on to your stocks even if the market is struggling. It makes sense to buy some premium stocks at a discount if you have the means to do it.
7. Gold Is the Best Inflation Hedge
A common myth prevails that investing in gold can secure you against future inflation. Many believe that when the price of gold increases and inflation rises too.
History shares a different picture. During some of the most inflationary periods in economic history, gold has yielded negative returns. So, it is not a good inflation hedge at all.
When the dollar weakens against foreign currencies, investors in gold reap the benefits.
Bottom Line
Take investing myths with a pinch of salt. When investing, rely on your research, and calculate your risk before taking the plunge.
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