5 Common misconceptions about investing
Many times, people fail to venture into the world of investments because of misconceptions. Many tend to buy various investing myths that float online and end up either making bad investment decisions or completely refrain from making any investments at all.
Misconceptions are nothing but an altered form of reality. They are deceptive and take you away from the best possibilities life has to offer. From the caveman age, we are known to live with something called a confirmation bias. So what happens is, if you already believe that a particular style of investing is bad, then you would tend to pay more attention to studies and information that supports your belief. Hence, it becomes very difficult to break out of your biases. But, with some resolute effort, it is possible to explore a whole new world of investment opportunities.
Here is a list of the most common misconceptions that are keeping you from growing your wealth to the fullest.
It is better to invest when you are older
There is no specific age to begin investing. The best time is when you are ready. But if you have been earning for a while and have been waiting to turn older to invest, then that may not be a financially sound decision. The reason is simple: the earlier you start investing, the better it is. Investing a small amount regularly for longer periods allows you to take advantage of reinvesting and compounding. Plus, it allows you to make up for all the losses you make over a period of time. The later you invest, you get that much less time you left to reach retirement. This would mean having larger investment and saving targets to ensure you have enough to enjoy your life post-retirement. Hence, the idea of investing when you are older is a misconception that really needs to be eliminated.
You don’t know enough to invest
It might seem like a complex decision making process but you never learn the rules of the game unless you start playing. Only when you start investing will you gain better insights about how to go about making smart investment choices. Even the biggest investment gurus tend to make, in hindsight, bad choices at times but the good choices they make are a result of their persistence and willingness to learn.
As you go about investing in stocks and mutual funds, you will be forced to keep a tab of the market. While doing so, you will be able to decipher patterns and deduce strategies for better financial decisions. Moreover, there are many courses online that can help you get acquainted with the world of smart investing.
Professional investors are smarter
As per a post in investopedia, “professional investors, and in particular institutions, manage the majority of the world’s financial assets but as a group, they fail to beat their index”. Sometimes adopting a passive approach is what works as compared to an actively managed funds. Therefore, individual investors have a better chance of making profits. They can improve their returns by focusing on low-cost investment managers and mutual funds. They can also take professional help to make better decisions. So, it is not true that only professional investors are smarter because many times individual investors can outsmart professional investors.
Diversification is the best way to go
Another important industry recommendation is to spread out your investment bets. Asset allocation is said to offer the safest approach to investing, allowing one asset class to zig upward while another class may zag into the negative performance territory. Theory states that the risk of the overall portfolio is less risky by holding more assets.
This may hold true when an individual is already wealthy. In this respect, it is quite important to protect wealth and spread out bets into many different assets. However, if an investor aims to grow wealth, he or she should consider concentrating bets into specific investments that have a solid likelihood of outperforming their indices, thus accruing wealth at a higher rate. Continuing the discussion above, picking good stocks and a manager with a solid investment track record can help investors accelerate their wealth creation.
Investment decisions should be made based on recent returns
It is tempting or more like a natural response to base your next investment decision on your returns from the previous investment. But is this really a good way of going about making investment decisions? Not really. Let’s say you take a look at the recent market trends and figured the investment options that are performing well and base your decision accordingly. This is, in most cases, a trap. You see, every asset class performs in cycles. The asset class that performs well today may not perform well in the upcoming days.
Beware of these investment myths and misconceptions and start investing. Always start small i.e. with the kind of money that you can risk. With baby steps, you too can learn your way into investing right.
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