There are many misconceptions about investing that are holding back young adults from taking the dip or planning the right paths for their futures. By John Folger
Investing is seen by many as an arduous task – one that is complicated, risky and best left to other people. It is often easier to avoid investing altogether, than confront it head on. A natural human reaction is to create excuses that rationalise why one has chosen to avoid an activity.
The task of investing at a young age is no exception: a variety of misconceptions about investing young perpetuates the idea that investing is best left to older people and experts. Many young adults don’t take the time to understand how to invest wisely. In many cases, this is because they are concerned about the here-and-now, not the future.
While you don’t have to forgo your lifestyle when you are young, taking a long-term focus and investing consistently over a long period of time will ensure that your savings and net worth are there when you need them
This article will examine several of these misconceptions that are often used as an excuse to delay or avoid investment activity.
I Don’t Have Enough Money
While it is true that young adults are usually inundated with debt – from student loans, car payments and mortgages – many can find at least a small amount of money to invest on a monthly or yearly basis. Contributing to employer-sponsored plans, such as EPF or PRS can allow a small investment to grow over time, particularly when matched by the employer.
The power of compounding creates a golden opportunity for young investors, even those on a tight budget. It is important to keep in mind that investing does not have to involve huge positions; it is possible to invest in a very small number of stock shares.
I Don’t Know Anything About Investing
Ignorance is not an excuse to avoid investing. Young investors have many years to study, research and develop proficiency in investing techniques and strategies. A wealth of information is available to tech-savvy young adults, from financial and education websites, to social media pages, webinars and the many advanced trading platforms that are available for free or for a limited monthly fee.
Investing Is Too Risky
Many young adults are keenly aware of the economic crisis and the resulting chaos that ensued. While investing can be risky, it can be managed in a way that keeps it from being too risky, however that is defined for each individual.
Young investors with a low risk tolerance can select more conservative portfolios, like blue-chip stocks and bonds. Investors with a higher tolerance for risk can enter more aggressive positions with higher reward potential.
Investing Can Wait Till I’m Older
Young investors have to contribute less to make more money over time than older investors. This is due to the power of compounding. A person who starts at age 20 and invests RM100 per month until age 65 (a total contribution of RM54,000) will have more than RM200,000 when he or she reaches age 65, assuming a 5% return.
If the person delays investing until age 40, he or she will have to contribute RM334 each month (a total contribution of RM100,200) to arrive at the same RM200,000 by age 65.
Investing Is For Old People And Wall Street Types
While the media do portray many investors either as wizened old men or young, power-hungry Wall Street types, most investors are ordinary people, both young and old, wealthy and not. Even though we often hear “You are never too old to start investing (or saving for retirement),” the opposite is true as well: people are never too young to start investing.
My Retirement Saving Should Be Sufficient
Depending on your retirement saving or even pension can be risky. It is difficult to predict where social security will be in future years, and many investors learned the hard way in the last decade that employee-sponsored retirement plans don’t always work out. Starting young and diversifying through a variety of investment vehicles is the best way to secure one’s financial future.
Young adults often have so many distractions that it is difficult to set aside the time to think about investing. In addition to being busy with friends, work and hobbies, this age group is often burdened by a significant amount of debt, making investing seem like something that will have to wait.
Despite these common misconceptions about investing young, those who do start studying, researching and investing young, have many advantages over those who wait, including the power of compounding and the ability to weather a certain degree of risk.
Many seasoned investors can also tell the difference between an amateur investor and a professional one, just by talking to them. Here are some common investing statements that you should avoid using, and some helpful alternatives that will not only make you sound more knowledgeable and wise when discussing the markets, but should also help you think more like a professional investor.
My investment in Company X Is A Sure Thing
Misconception: If a company is hot, you’ll definitely see great returns by investing in it.
Explanation: No investment is a sure thing. Any company can hide serious problems from its investors. Many big-name companies – like Enron and Lehman Brothers in the US- experienced sudden falls. Even the most financially sound company with the best management could be struck by an uncontrollable disaster or a major change in the marketplace, such as a new competitor or a change in technology. Furthermore, if you buy a stock when it’s hot, it might be overvalued, which makes it harder to get a good return.
To protect yourself from disaster, diversify your investments. This is particularly important if you choose to invest in individual stocks instead of, or in addition to, already-diversified mutual funds. To further improve your returns and reduce your risk when investing in individual stocks, learn how to identify companies that may not be glamorous but offer long-term value.
An experienced investor would say: “I’m willing to bet that my investment in Company X will do great, but to be on the safe side, I’ve only put 5% of my savings in it.”
I Would Never Buy Stocks Now Because the Market Is Terrible
Misconception: It’s not a good idea to invest in something that is currently declining in price.
Explanation: If the stocks you’re purchasing still have stable fundamentals, then their currently low prices are likely only a reflection of short-term investor fear. In this case, look at the stocks you’re interested in as if they’re on sale. Take advantage of their temporarily lower prices and buy-up. However, do your due diligence first, to find out why a stock’s price is driven down. Make sure it is just market doldrums and not a serious problem. Remember that the stock market is cyclical, and just because most people are panic selling doesn’t mean you should, too.
An experienced investor would say: “I’m getting great deals on stocks right now, since the market is tanking. I’m going to love myself for this in a few years when things have turned around and stock prices have rebounded.”
My Investments Are Well-Diversified Because I Own A Mutual Fund That Tracks a Variety of Portfolios
Misconception: Investing in many stocks makes you well-diversified.
Explanation: This isn’t a bad start – owning shares of 500 stocks is better than owning just a few stocks. However, to have a truly diversified portfolio, you’ll want to branch out into other asset classes, like bonds, treasuries, money market funds, international stock mutual funds or exchange traded funds.
Owning a mutual fund that holds several stocks, helps diversify the stock portion of a portfolio, but owning securities in several asset classes helps diversify the complete portfolio.
An experienced investor would say: “I’ve diversified the stock component of my portfolio by buying an index fund that tracks the S&P 500, but that’s just one component of my portfolio.”
I Made RM1,000 In Ihe Stock Market Today
Misconception: You make money when your investments go up in value and you lose money when they go down.
Explanation: If your gain is only on paper, you have not gained any money. Nothing is set in stone until you actually sell. That’s yet another reason why you don’t need to worry too much about cyclical declines in the stock market – if you hang onto your investments, there’s a very good chance that they’ll go up in value. If you are a long-term investor, you’ll have plenty of good opportunities over the years to sell at a profit.
Better yet, if current tax law remains unchanged, you’ll be taxed at a lower rate on the gains from your long-term investments, allowing you to keep more of your profit. Portfolio values fluctuate constantly, but gains and losses are not realized until you act upon the fluctuations.
An experienced investor would say: “The value of my portfolio went up RM1,000 today – I guess it was a good day in the market, but it doesn’t really affect me, since I’m not selling anytime soon.”
These misconceptions are so widespread that even your smartest friends and acquaintances are likely to reference at least one of them from time to time. These people may even tell you you’re wrong if you try to correct them.
Of course, in the end, the most important thing when it comes to your investments isn’t looking or sounding smart, but actually being smart. Avoid making the mistakes described in these five verbal blunders and you’ll be on the right path to higher returns.
Achieving success with these long-term investment plans requires that you consistently make contributions, adopt a long-term mindset and not allow day-to-day stock market swings deter you from your ultimate goal of building for the future. To make the most of your earnings when you’re young, avoid these common mistakes.
To many, investing seems like a challenging process. It requires focus and discipline. In order to avoid it, many young investors convince themselves that they can invest “later” and everything will be ok.
What many people don’t realize is that the earlier you start putting money away, the less you’ll have to contribute. By investing consistently when you are young, you will allow the process of compounding to work to your advantage. The amount that you invest will grow substantially over time as you earn interest, receive dividends and share values appreciate. The longer your money is at work, the wealthier you will be in the future and at the lowest possible cost to you.
When you are investing at a young age, you can afford to take some calculated risks. That said, it is important to have realistic expectations of your investments. Don’t expect every investment to immediately start delivering a 50% return. When the markets and economy are doing well, there are stocks that do have returns like this, but these stocks are generally very volatile and can have huge price swings at any time.
By expecting paper losses in bad years and an average return of 8 to 12% per year over the long run, you can avoid the trap of abandoning your investments out of frustration.
Diversification is a strategy that will reduce your overall risk by having investments in a variety of different areas. This allows you not be too exposed to an investment that might not be doing so well and helps keep your money growing at a consistent, steady rate every year. Investing in index funds is a great way to diversify with minimal effort.
Letting Your Emotions Drive Your Investments
Another mistake that many investors make is becoming emotional about their investments. In some cases, this means believing that an investment that has done well in the past, like a high-performing stock, will continue to do well in the future. Buying an investment that has a high price because of its past success can make it difficult to profit from that investment.
Conversely, many people will sell their investments, or stop making their investment contributions when the markets are down or the economy isn’t doing well. This behavior will lock in your losses, hurt your compounding and take you nowhere.
John Folger is a technical analyst and system researcher with PowerZone Trading and a private trader specializing in the e-mini markets. John is an affiliate of the Market Technicians Association, a regular contributor to Futures magazine and was previously a real estate broker.