- Investing is only for the rich.
- Investing is like gambling with your money — too risky.
- The government or big companies will steal my money if I invest it.
- Investment is too complicated to learn.
- You have to hire a broker to invest and pay them a lot of money.
- You can’t invest with a mortgage, loan payments, and credit card debt.
Investing is only for the rich
This could not be farther from the truth. Investing is for people of any income level and wealth. The only exception to this is hedge funds and front-load high-end mutual funds, both of which often require huge minimum investments.
Other than those, thousands of mutual funds have minimum investments under a $700, while stocks have no minimum investment and as many shares of stock can be bought for simply the share cost and your broker fee. Certificate of Deposits has minimum investments anywhere from $100 to $10,000.
Similarly, bonds — government or company vary widely in their costs. For beginning investors, however, stocks and day trading should probably be avoided.
Investing is like gambling with your money — too risky
On average, the United States’ Stock Market has returned 11 percent every year. There have been periods since 1940, however, where it has lost as much as 20 percent in one year. The secrets to investing are patience and diversification.
If you have patience and trust in the U.S. economy that it will always bounce back from whatever recession it hits, then investing is nothing like gambling. At the casino, the odds of winning may be less than one percent. With the stock market, you’re almost guaranteed a return on your investment if you diversify and have patience.
Think about it—the average return overall is 11 percent per year. That means your invested money will double about every seven years on average. You can both beat and lose the stock market average, but even with losing, your returns after ten years will probably still be positive.
The government or big companies will steal my money if I invest it
While the government hasn’t done much to dissuade its endless reservations in recent years, it will not steal your invested money. Big companies like Enron, too, haven’t exactly had much popularity lately, but the legal troubles of one company you’re invested in shouldn’t hurt you if you diversify.
The government insures Certificates of Deposits, which is an investment tool used by banks that offers average returns but is extremely safe for up to $100,000. When you invest in a business, you are either lending it your money (through a bond) or buying a part of it (through a stock).
In this sense, they can’t just steal your money. You are an owner of the company or a lender. You can suffer losses, but hopefully you won’t, as the saying goes, have all your eggs in one basket, so the bottoming of one company will not hurt you. In fact, you can avoid big company and government distrust altogether by investing in small companies or through banks with CDs. To diversify, you can use what is called a mutual fund.
A mutual fund is an investment tool that usually contains hundreds of different bonds and stocks.
When you put your money into a mutual fund, it is spread throughout the stocks, thus reducing your risk significantly. There are hundreds of mutual funds, each with a particular purpose. Some are geared to long-term growth and are very risky, while some are very conservative and geared to short-term growth with smaller returns.
Investing is too complicated for to learn
The best part about mutual funds, Certificates of Deposits, government bonds, and company bonds is that you don’t need to understand or learn a whole lot. CDs and government bonds are excellent places to invest your money concerning security because almost without exception, you make a return on your investment. However, you should be aware that CDs and government bonds offer the smallest chance for a large return.
In other words, the riskier the investment, the more chance it is that you will make a substantial return.
For the beginning investor, getting too risky would not be a good idea. It would be a good idea, however, to invest, say, 20 percent of your savings into a high-risk mutual fund, 30 percent in a moderate-risk mutual fund, and 50 percent in government bonds, company bonds, and CDs.
You have to hire a broker to invest and pay them a lot of money
Brokers are primarily used for trading in the stock market directly. As a beginning investor, you should stay away from purchasing individual stocks and trading rapidly. Investing in stocks directly is not good for a few reasons. It usually requires a broker, which costs money. People are less likely to diversify when investing in stocks themselves. This means a significant portion of their savings will go into three or four stocks, sometimes in the same sector of the economy.
Lastly, investing in stocks encourages quick trading and sketchy predicting. Predicting the stock market doesn’t work, and fast day-trading or even month-trading is horrible because there are fees associated with every trade that you make.
Investing in mutual funds solves this problem by investing in hundreds of stocks at once. Although mutual funds charge a fee, it is far more worth it than the fee associated with a broker. Additionally, mutual funds have millions of dollars in their name and actively seek to increase this money. For these reasons, mutual funds usually are better for investment than individual brokers.
You can’t invest with a mortgage, loan payments, and credit card debt
Unfortunately, there is some truth to this line of thinking. Mathematically, it only makes sense to invest money when the rate of return you’d make on the money is higher than the rate of return you have to pay for your debts. But it’s a little more complicated than that.
The interest on credit cards is compounded continuously usually, while investment returns are compounded daily. Additionally, investments have fees associated with them in the form of mutual fund fees or broker fees. Even worse, sometimes you have to pay taxes when you cash in your investments.
Investing is a great choice for everyone, but high-interest credit card debts need to be paid off first. If your interest rate on your credit card is 10 percent, you’d need to make something between 13-14 percent returns on your investment before it is worth the investment over paying your credit card. For debts with interest rates under 4 percent, though, it is probably worth it to invest your funds over paying down the debt, as rates of returns on investments average about 6 percent.
On the other hand, your mortgage is one of the few debts in life that is worthy as the value of your home appreciates over time. Because of this, I would suggest paying the monthly payments on your mortgage and investing your savings instead of using it to pay more of your mortgage. Besides mortgage debt, the second exception to the paying above 4 percent debts first is when you have a 401(k) plan.
A 401(k) plan is an employer-sponsored investment tool.
It is a way to encourage you to invest and save for retirement. You can set the amount of your pre-taxed pay to go into your 401(k). Within your 401(k) is usually a bunch of different mutual funds and sometimes company stock. You should usually use about 4 or 5 mutual funds and avoid investing in company stock. The greatest benefit of a 401(k) plan is the employer match.
Usually, your employer will match your contribution up to a certain amount by a certain percentage. In other words, your company might match you up to 5 percent of your salary by matching your contributions by 50 percent. This is an automatic 50 percent return on your investment.
The rule is, then, always invest in your 401(k) up to the point where your employer stops matching your contribution and then pay off higher-interest credit cards, loans, etc.
Achieving financial comfort is a hard thing to accomplish in life. Investing, coupled with debt management, is among the best ways to achieve your goals, but unfortunately one of the most undervalued and misunderstood. We hope this article can help you to dispel some of the misconceptions of investing and at the same time, live your own goals financially.