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:
- Investing is really risky, and I’m not really a gambler at heart.
- Investing is only for rich people.
- Investing could lead to easily getting scammed.
- I can put investing off ’til later.
- 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