5 Common Misconceptions About Investing

how to shield yourself from risk in investment decisions

how to shield yourself from risk in investment decisions

There are many common misconceptions about investing that I come across almost every day (yes, I do chat about investing that often with friends and colleagues). There are two main reasons for these misconceptions’ prevalence. Firstly, lack of knowledge. Secondly, lack of experience. Knowledge and experience can be linked, but they are not the same. What I’ve discovered over the years, is that as long as you have a lot of knowledge about something, you can give it a go with low levels of risk. However, building up knowledge sometimes takes a lot of time and people may be eager to get going on something. Yet going straight to experiencing things without any knowledge of them is often a way to get burnt.

Here are the top 5 investing misconceptions I come across, when talking to friends and colleagues:

  1. Investing is really risky, and I’m not really a gambler at heart.
  2. Investing is only for rich people.
  3. Investing could lead to easily getting scammed.
  4. I can put investing off ’til later.
  5. Investing is really difficult.

1. Investing is really risky, and I’m not really a gambler at heart

There are risks involved in most of what we do in life. We eat out, we could get food poisoning. We cross the road, we could get hit by a car… or a bicycle in my case. Investing is not the same as gambling:

Investing is putting money into something where you are hoping for profitable returns (and in theory you can potentially get your original money back).

Gambling is putting your money into a game of chance with the hope of winning (and you DON’T get your original money back).

There are varying levels of risk in whatever we do with our money. You could put it into the National Savings & Investments at almost no risk (unless the entire nation implodes, but that’s not exactly likely). Putting your money in a bank savings account is also kind of investment – albeit, a very low risk one, but then who remembers Northern Rock? I remember huge queues outside their Cambridge branch when the bank failed. I spoke to some of the people in the queue and one guy told me he had his life savings in there. I was utterly shocked and told him to put it into Index-Linked National Savings Certificates instead (they were still available at that time) if he wanted a safe place to stash it without investing it in other ways. One of the ways we mitigate risk is to spread our money around different types of investments e.g. a house, some index-linked certs, p2p lending, bank accounts, and dividend growth stocks.

2. Investing is only for rich people.

Very, very common this one. Basically, no, you’re wrong. Investing is not for rich people, it’s for people. If you’re sticking £150+ away every month in a savings account, then you could open a stocks and shares NISA with iii.co.uk and invest using their regular investing service for £1.50 per trade. You could use Halifax Sharebuilder at £2 per trade and accrue fractional shares using dividend reinvestment. If you want to buy mutual funds instead of stocks and shares, you could even invest without any dealing costs, in which case, as little as £20+ per month could get you started. You can also get a pension from just £20 per month.

3. Investing is scary because I could get scammed.

Yes, you could. But you could get scammed over the phone on one of those dreaded cold calls about having a car accident. But if you’ve got a bit of common sense, and you invest in your own education first, then it’s unlikely you’ll get scammed. Just remember, if something seems too good to be true, it probably is. Read books, learn and research using websites such as Investopedia and Digital Look, and read the Financial Times to get familiar with financial terminology and economic information.

4. I can put investing off ’til later.

There are countless examples around the internet of stories that are used to illustrate the power of investing when done over a long time, as well as when done for a short time, when started early in your life. There are two pretty good examples of this, an example of long-term saving was recently highlighted by Jason, of Dividend Mantra, and a lovely little piece of research about short-term early-start savings was discussed here.

The first story is about a petrol station janitor who amassed US $8 million over his life by investing steadily in companies he knew. It helped that he lived ’til he was 92, but a huge WOW is still in order. If a janitor can accrue that much money by living a simple lifestyle and investing for a long time, just imagine what you could do with a decent salary combined with a simple lifestyle! This is why so many in the personal finance blogosphere are aiming for FI – Financial Independence, including ourselves. Some people like Jason are only using dividend growth investing, whereas here at There’s Value HQ, we are using a combination of dividends, p2p lending, inflation-linked bonds, and our pensions.

The second story is one of those amazing strange-but-true situations that can happen. Person A invests £2500 per year from age 21 to 30 years old, whereas person B invests £2500 from 30 to 70 years old. Which one has more money at age 70? Believe it or not, it’s Person A. She accrued £553,000 compared to Person B’s £534,000. There are lots of factors that could change over that many decades, but basically, the early bird catches the worm, so if you’re young, get investing, like, NOW.

5. Investing is really difficult.

Investing is actually not that difficult, as long as you make sure to get educated before you begin doing it. Seek out professional advice from an IFA (I am not one), read investment books (borrowed for free from the library), use the internet, and read the FT, and try to learn from the people you know who have also invested. Then, and only then, invest your money. Of course, you can always put your savings into a stocks and shares NISA and decide what to do with it after some months’ worth of learning.

What other investing misconceptions do you come across regularly? Let me know, leave a comment below.

photo credit: bplanet/freedigitalphotos.net

14 Comments

  1. I’m eight months late here, but I just wanted to pop in and say I really enjoyed this article.

    It always amazes me how much people want to avoid the stock market due to their aversion to risk. I work in a bank, and I see the savings and CD rates. And they are well below the inflation rate. I guess there’s no risk there; you are GUARANTEED to lose purchasing power on your money in the long run.

    I think I’ll take the “risk”. Seems less risky.

    Sincerely,
    ARB–Angry Retail Banker

    1. Yes, you’re right. One thing I always ask is ‘do you have a pension’? To which they usually answer ‘yes’ – well guess what, it’s invested in the UK stock market…

      But the inflation side really gets me too, you’d think people would ‘get that’ a bit wouldn’t you?!

      Thanks for your comment!

  2. You should try rephrasing to your friends as “owning a business”. You could ask if they would like to own McDonalds as a whole, in an abstract sense, if they saw the profits and felt it was a satisfactory return. If they are, they can own it in a fractional sense. Make them think about the products. Diageo is a great example – put a pint of Guinness in their hand and ask them if they would like to make money every time someone in the world orders a pint.
    Steve recently posted…Winter Vacation to the Oregon CoastMy Profile

    1. that’s a fantastic idea… i often think of that for myself, but never think about explaining it like that to others… d’oh

      thanks Steve

  3. Hi M,

    I enjoyed your article. I think popular culture is another reason investing is ‘gambling’, ‘risky’, ‘for the rich’ etc. When it comes to options and derivative trading, investing really is gambling. People likely associate the stock market with stories about Barings Bank or JPM’s London Whale etc. And those stories grab the headlines much more than the millionaire next door.

    I’ll go out on a limb and say that the common stereotype of an investor is likely not a person driving an average car in an average home with a portfolio of index funds.

    So there’s certainly a need for (re) education – I grew up thinking investing was for wealthy people, and it wasn’t until 2012 that I bought my first shares.

    It’s almost a moot point if the market is random or not…the fact is, that it’s unpredictable which largely amounts to the same thing. Diversifying as you mention is key – people figured this out way back when with “don’t put all your eggs in one basket” but it seems, in the search for quick riches, many forget what our forebears have learned.

    Best wishes,
    -DL
    Dividend Life recently posted…February Stock Purchase #3My Profile

    1. I think you’re right… ‘the millionaire next door’ is the guy who drives a 17 year old estate (stationwagon)

      Thanks for your thoughts, always appreciate them.

    1. You’re right – day trading is a major risky deal! But how do we best inform people that proper investing isn’t scary and dangerous?

  4. Lucky you getting to talk about investing every day! I only get to ‘talk’ about investing amongst the blogging community!

    However, with regards to point 1, I’d say that gambling is similar to investing because in theory, you CAN potentially get your money back, even with something like the lottery. Just that the odds are slim but still possible.

    The main difference is that when you invest, you own something, be that units or shares. When you place a bet, you own nothing.

    Also, investments are generally long-term and the longer you leave them, the more chance there is for you to increase your returns as time goes by. Gambling/betting is almost always short term, instantaneous in many cases.

    I’d also say that gambling isn’t only about chance – I’d have thought that successful poker players actually have skill so they keep winning?

    As for investing and chance – how about those famous monkeys picking stocks by throwing darts and doing better than stocks picked by experts? 🙂

    But yes, essentially, I agree with what you’re saying – by and large, the risk is different and investment risk isn’t one that people should be afraid of.
    weenie recently posted…Good News at WorkMy Profile

    1. Good points about gambling. I think the length of time is the crucial thing here really. When you invest, especially in dividend-paying shares, it’s about long-term growth or receipt of growing income. It’s not about short-term gains.

      There is definitely some skill involved in poker, although unlike in buying stocks, you do not get to choose your hand in advance. You have to play your hand as best as you can and constantly monitor every other player… and maybe also count cards 😉

      I’m not expert, but I’m not monkey either. There are plenty of random facts about stockpicking and fund returns and the like, it often seems quite random, but I don’t think it is really. If you invest in high quality, well-run, dividend-paying businesses you will probably do well for yourself.

  5. Really liked this article, M. Those are some of the most common misconceptions I hear as well, but by far the most is that the fear and lack of understanding – sort of a combination of your #3 and #5. People seem to be fearful of what they might happen coz they’ve all heard those scary stories of ponzi schemes or the slick wall streeters taking a cut and leaning the playing field in their favor. I try my best to convince ppl that just saving isnt enough, you have to invest if you need to get anywhere with your retirement. Some listen some dont.

    R2R
    Roadmap2Retire recently posted…Chatter Around the World – 84My Profile

    1. Thanks R2R. I try to convince people too, but most don’t listen. Despite this, they mostly have their company pensions invested in the market without even realising it… an odd irony!

Leave a Reply

Your email address will not be published. Required fields are marked *

CommentLuv badge