When it comes to investing money, there is a lot of misinformation out there. Many people seem to think they are an expert, and it can be difficult to sort through all the noise. The truth is that investing is a complex process, and there are many misconceptions out there that should be avoided. Like many popular myths, it can be hard to identify the fallacy, and it might take some explaining to realize why believing them can hurt your investments fully. To help get started, we’ve identified and outlined eight common myths about investing.
#1: “I’m Too Young for Investing / I’m Too Old for Investing”
One big investing myth that trips people up is thinking your age sets the rules for investing. Some folks might think they're either "too old" or "too young" to jump into it. Sure, kicking things off early can give your investments more time to grow, but let's clear this up: it's never too late to get in the game. Even if you are in your 50s or beyond, there are options for investing, like making extra contributions to IRAs or 401(k)s. If you're just getting your career wheels turning, don't sweat your youth – it shouldn't stop you from diving into investing. While time makes a difference in investing, you can still start your path to financial well-being with solid strategies and guidance from an expert team.
#2: "I Know Everything There Is To Know About Investing”
Overconfidence bias is a cognitive behavior that leads people to believe that they are more skilled and knowledgeable than they are in reality. This bias can lead to disastrous consequences in investing. because it leads investors to believe that they have a greater level of control than they do. Investors become blind to their limitations and assumptions, and this can have costly consequences.
Investors with an overconfident bias are more likely to take dangerous risks and hold on to losing positions for too long, hoping the market will turn around. As a result, overconfidence can be a major drag on investment performance.
#3: “Things Have Been Going Wrong, It’s Bound To Turn Around.”
The Gambler’s Fallacy is the belief that if something happens more frequently than normal, it will happen less frequently in the future. In other words, gamblers believe that if a coin has landed on heads four times in a row, then it is more likely to land on tails on the fifth flip. Thinking this way can be dangerous as it leads people to make irrational decisions based on false assumptions.
For example, investors might expect a market rebound after a prolonged period of decline and buy risky stock. This line of thinking neglects the fact that stock prices are determined by underlying conditions, such as a company’s earnings and economic growth.
As such, the Gambler’s Fallacy can lead to financial losses and missed opportunities for profit.
#4: “Everyone Else Is Doing it, So Should I”
Humans are social animals, and we often take our cues from others when making decisions. This is especially true when it comes to investing, where we often look to others for guidance. This can lead to herding behavior, where investors buy or sell based on what everyone else is doing. While seemingly safe, this move is dangerous because it is largely influenced by emotion and instinct rather than independent analysis. For example, if everyone is buying a stock because it seems like a sure thing, the price will go up. But eventually, reality will set in, and the stock will drop, leaving investors with losses. Herding behavior can also lead to panic selling, where everyone tries to sell at the same time, which can cause prices to plummet and leave investors with big losses.
#5: “Investing is Too Risky and Not Worth It”
Sure, investing does come with its fair share of risks, and you've probably seen that ominous warning: "you may not get back what you invest." But is it really "too risky"? Well, let's break it down and see what's what.
Investments fall on a risk spectrum. On one wild end, you've got high-risk, roller-coaster-like investments like hedge betting. These are not for the faint of heart; your original investment can swing wildly, potentially resulting in big gains or devastating losses.
On the other end of the spectrum, you'll find the low-risk, "cautious" investments. If you go for one of these, your investment won't be risk-free, but it won’t be quite as volatile.
No matter your risk appetite, there's an investment that suits you, from the cautious types to the adventurous souls and everyone in between. We can help break down different investment opportunities based on how risky you want to be with your investing.
#6: "Everyone Else Is Doing It, So Should I"
The fear of missing out, or FOMO, is a common feeling when it comes to investing. After all, no one wants to overlook a good investment opportunity. However, it's important to remember that just because everyone else is doing it doesn't mean you're missing out. As mentioned above, following the herd can often lead to poor investment decisions. When investing, it's important to do your research and ensure you're comfortable with the risks involved. Blindly following what everyone else is doing can lead to serious financial losses. It is best to be an independent thinker and talk to experts in the field, like an investment firm, to make the best decisions.
#7: “Stock Market Investing Is Only for the Rich”
That might have been true once upon a time, but things have definitely shifted.
In the past, buying stocks in sizable chunks was the norm; diversifying your investments was pricey because mutual funds weren't around, and trading fees were sky-high.
This setup didn't favor everyday people looking to invest small amounts for their retirement. Instead, it catered to the wealthy elite who had loads of cash to safeguard and grow. In a nutshell, it was a game for the rich.
But the times have changed. We now have specialized retirement accounts, mutual funds, exchange-traded funds, electronic trading, and no more pesky minimum commissions. These changes have opened up the world of stock market trading to regular folks like you and me.
Now, virtually everyone can enjoy the same opportunities that were once reserved for the privileged few. Of course, there's always some risk involved, but we can help you navigate those risks.
#8: "I've Already Invested A Lot, I Can't Back Out Now"
The sunk cost fallacy is a cognitive bias that leads people to continue investing when they have already invested a significant amount of time or resources, even if it is no longer rational to do so. This can lead to suboptimal decisions and cause people to stick with bad investments. There are several reasons why the sunk cost fallacy occurs, including a desire to avoid loss, a need for closure, and an unwillingness to admit defeat. However, the sunk cost fallacy can be overcome by recognizing when it is occurring and making decisions based on future potential rather than past investment. In some cases, sticking with an investment can pay off, but only if there is reason to believe that the investment will be successful in the future. Otherwise, it is time to move on.
No Myths, Just Better Investments
Investing can be complicated and a little intimidating. Whether you are just learning about the stock market or you have years of experience, there are many investing myths to avoid. Myths, fallacies, and misconceptions like Overconfidence Bias, The Gambler’s Fallacy, Herding Behavior, FOMO, and Sunk Cost Fallacy will trap investors into making mistakes and can lead to financial losses. These are just a few of the many myths about investing, and it is important to educate yourself about investment myths and mistakes to minimize the chance of harming your investment strategy.
Benefit & Financial Services LLC. is a comprehensive firm that offers business continuation planning, employee benefits, estate analysis, health and medical plans, investment strategies, life insurance planning, and retirement planning. If you would like to learn more about avoiding investment myths, contact the professionals at Benefit & Financial Services today.