6 investment myths busted

There are several myths around investing that could hold people back from investing. It's time to ease some of your concerns by debunking investing myths so you can feel confident about investing.

Myth 1: Investing in the stock market is gambling

At first glance, gambling and investing might seem similar as both involve a degree of risk and the hope of making money. However, the underlying principles between them are quite different.

Gambling relies on chance: it's placing a bet on an uncertain outcome, such as predicting a winning sports team, guessing the winning lotto numbers or getting the winning combo on the slot machine.

On the authority of the Queensland Government website we can tell you that the odds of winning when it comes to gambling are low.

The chances of winning by gambling

• Golden Lotto: 1 in 8,145,060
• Top prize on poker machine: 1 in 7,000,000
• Powerball: 1 in 134,490,400
• Horse racing: 1 in 1,716
• Keno: 1 in 8,911,711
• Instant scratch: 1 in 1,700,000

On the other hand, investing in shares is about making informed decisions to invest in companies, typically with the expectation of growth through the increase in value of the share price (capital growth) or by generating income (dividends). 

It's worth noting that there is a difference between investing in fundamentally sound companies and taking measured risks vs investing in speculative shares, which is more likely to be gambling. Unlike a poker game, which relies on luck, investing in stable companies is not a gamble.

The added benefit of investing is that if you do so long term, you increase the likelihood of your investments returning a profit. The longer you gamble, the more the chances are of the opposite being true.

Myth 2: It's safer to have money in a bank account

Is money in the bank safer than investing? Well, kind of. What we're really talking about here is risk. Having cash in the bank is low risk, whereas investing can be higher risk. If you have $10,000 in the bank and need to access it in three years' time, the likelihood of still having $10,000 is very high.

Conversely, as the market fluctuates from year to year, in three years' time there's no guarantee that you will have exactly $10,000 in your account if you invest this money. You might have more (win), but you also might have less. Keep in mind that you haven't really lost money unless you choose to sell during a downturn since fluctuations are a normal part of investing. You need to be in it for the long run.

So, why would you invest instead of leaving your money in your bank account where it almost seems like a sure thing?

We've seen how inflation is the primary factor that eats away at the purchasing power of your money. For example, at a 3% annual inflation rate, in three years $10,000 would only be worth $9151.42. This highlights how keeping cash leads to a loss in its real value due to the steadily rising annual cost of living.

While investing carries a higher risk than holding cash, it has historically had higher returns over the long term. This makes investing in shares a worthwhile strategy to use for overcoming the effects of inflation.

There are some exceptions to this, though, such as saving for shorter-term goals or an emergency fund.

Myth 3: I could lose all my money

The truth is that no one knows what will happen with the share market from day to day. This uncertainty is why there's an emphasis on long-term investing. Share market values can change dramatically over short periods but the likelihood of losing all your money depends on what you invest in and when you pull your money out - also known as 'realising your gains' or 'crystallising'.

Here's an example. Let's say you buy 10 shares at $2 each - so you have a total investment of $20. The share price suddenly drops to $1. If you find yourself needing $10 urgently, you'll be forced to sell all 10 shares at the reduced price, crystallising - or locking in - those losses. If you wait until the share price increases - possibly back to $2 or more - you would only need to sell a smaller number of shares to get the $10 needed. This highlights the importance of not selling during a downtown and instead waiting for the market to recover.

As we've seen, the market moves up and down constantly, but it's only when you sell your shares that you've concreted the profit or loss. So if you've invested in a diversified, low-cost index portfolio and you've invested across many companies from many sectors, you've reduced some of your risk.

The likelihood of losing everything due to the market crashing to zero is low. A situation like that would require a massive global financial crisis (GFC) affecting all businesses and governments. Many will remember the impact of the GFC of 2007-2009, and how it affected people worldwide. But what's rarely noted is that if investors were well diversified (that is, they didn't have all their eggs in one basket) and didn't pull their money at the bottom of a crash, their money would have grown over the next 10-plus years.

Nevertheless, past performance isn't an indicator of future returns. The bigger risk can be argued: what if you don't invest and lose out on keeping up with inflation?

Myth 4: Investing is too complicated

We've been taught to believe that investing is complex. That's why there's so much jargon, which can make it intimidating.

'Investing' is an umbrella term: while day trading, for example, is very complicated and not for the everyday person, investing in low-cost diversified index funds makes investing a far more accessible, simple strategy that anyone can follow. 

Index funds passively track an index of an ETF or a managed fund. Index funds are popular for their low-cost, passive investing strategy.

Basically, if you can buy shoes online, you can buy shares. It's that simple to get started. Of course, there are nuances when it comes to understanding what to buy and what your optimal strategy is — and understanding your risk tolerance and timeline — but overall, getting started isn't hard.

Myth 5: You need to be good at maths to invest

Maths and financial literacy go hand in hand and result in some of the best financial outcomes. However, being good at maths isn't essential. So much of investing is about behaviour and psychology.

Investing is about focusing on having a positive money mindset and ensuring you are consistent and intentional. Putting away $100 a month doesn't require much maths, but what it does require is action. Taking action and signing up to a broker, depositing that first $100 and doing it continually over a long period of time is all about behaviour. If you can do that consistently, you're off to a great start.

Myth 6: Timing the market is the best strategy — just buy low and sell high

It makes sense: buy low and sell high and you'll be rich. However, in practice, it's really hard to do. It would mean you'd need to watch the market very closely and be ready to buy and sell at any time. Do you have time to watch the market all day, every day? 

Not only that, but even fund managers can't be consistent when it comes to predicting what the markets will do because no one can see into the future.

Consider this example. If you invested $1,000 into the Vanguard Australian Shares Index Fund in January 2000 and consistently added $100 a month, by January 2020 your investments would have grown to $66,300, and by March 2020 they would have dropped to $48,601.

Let's consider some scenarios based on this example.

• Scenario A: In March 2020 you decide to exit the market and move your shares into cash. Your investment would have increased to $53,000 by March 2023 (assuming a 0.6% cash return).
• Scenario B: You decide to continue adding $100 a month and don't sell. Your investment is worth $81,144 in March 2023. By deciding to sell, you'd lose $32,543 of potential financial gain, which is a missed growth of 67%.

This is an edited extract from How To Not Work Forever (Wiley $32.95), republished with permission and available at all leading retailers.