Investing is only for the rich. In fact, that's what 45% of the respondents of an HSBC survey believe when asked why they don't invest more, 23% believe that they don't know enough about investing. And 21% believe that investing is too risky. Now with that perception of investing, let's bust some myths.
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The first one is investing is risky.
Okay, agreed. All investments carry some risk, but, let me ask you, is not investing safe?
Let's run some numbers. Let's look at the cost of not investing. Say, you start with a hundred thousand dollars and inflation is at about 2%, which is generally the inflation in most advanced economies. Most of the time, not talking about current times, at the end of 30 years, your a hundred thousand dollars would be worth $55,000. Now, if the inflation was at about 6%, your a hundred thousand dollars would be worth $16,500. So, you would have actually lost $85,000 just by not investing.
Now, let's look at the flip side. You start with a hundred thousand dollars and you choose to invest in an asset that returns 10% year on year. After 30 years, your hundred thousand dollars will have become $1.9 million.
Let's look at the difference between those two. Now you being the judge, you do the math. Is investing risky or is not investing risky?
Myth number two: you need to be an expert before you start investing.
Now, were you an expert at driving before you started driving? Then, why do we think that we need to become experts at investing before we even start investing?
Well, I'll tell you why. Because as an industry, we in financial services don't make financial jargon easy for most people to understand. So, most people find finance to be very complicated and convoluted. But the good news is that. To manage your personal portfolio, you don't really need to understand much of macroeconomics or all of the financial jargon, like asset allocation and derivatives and whatnot. For your personal portfolio, understanding your personal needs and your personal ambitions is enough, along with some good and healthy money habits.
If you want me to do a video on money habits, leave a comment down below and I shall get to it.
But most of the financial services industry is actually built for commercial investment. So personal finance and commercial finance are very different. So like I said, the good news is that you don't need to spend a ton of time understanding all of the jargon that rules the commercial finance world. Your job is to nail your personal financial situation, and you can do that by following channels like these or picking up a personal finance book.
Myth number three is that you need to time the market.
This is a chart that shows the 20 best and worst days in the last 20 years. There's no way that any financial expert could have predicted what those 20 days would be, but the good news is that you don't need to predict those 20 days.
In fact, I'll show you something from Warren Buffet's portfolio, Berkshire Hathaway.
Source: Seeking Alpha
Now, if you take a closer look at this, you'll see that in the short term, one year, three years, 10 years, even Warren Buffet or his firm can't beat the S&P 500. So who are we to actually be able to beat the market?
But, if you look at the 20 years chart, you realize, Berkshire has outperformed the S&P by a mile, and that is what we want to do.
What matters is not timing the market.
What matters is time in the market.
So, pick an investment strategy, stay committed to it, and let the results speak for themselves in 30 years.
Myth number four is you need to pay off all your debts in full before you can start investing.
Now, there's a bit of truth to this one. But that is only for your high-interest debts like credit card debts. So, if your credit card debt is at about 20 to 25%, you want to pay that off as soon as you can, because compounding on that debt is just going to make that enormous. You don't want to do that, so pay that debt off as soon as you can.
But if you are talking about your mortgage and you have taken out a mortgage at about 2% interest, with that in fact, you want to invest. Say the market return is about eight to 10% and the mortgage interest rate you have is 2%. So on that, you are making a profit on that spread of six to 8%.
So, don't wait till paying off all your debt. Start investing simultaneously and you can gain on the spread. That obviously does not mean that you don't pay off your mortgage or don't pay off other student loans, et cetera. In fact, you want to pay them off so that you get rid of your debt burden as soon as you can. But equally, don't wait to pay off that debt till you start investing in the market.
Myth number five is that investing is only for the rich.
I have a question though. What do you think made the rich, rich? It's probably investing. Now you could say generational wealth. But, studies have shown that generational wealth mostly doesn't last beyond three generations. What lasts are good money habits of constantly reinvesting in yourself and your money into money-making assets.
I've started talking about money habits again. Do you want me to write about money habits? If so, please leave a comment down below and I'll get to it.
But what really matters are money habits and being consistent about your investments and letting compounding do the magic and make you rich.
Myth number six is that it's too late to invest.
Now, most people don't start saving for retirement till they are about 40 years old. And at 40, when they figure out the power of compounding and how they could have made their money grow in the first 20 years of their career, they think it's too late to start investing now.
The best time to start investing was yesterday. The next best time is today. Today is the youngest that you'll be. Today is the earliest that you can start investing so it's never too late. You might have to change your investment strategy as you go through the years, but it's never too late to start investing.
Myth number seven is that investing is time-consuming.
Now, I understand why you might think so because there's a lot of research that needs to go into business analysis, stock analysis, and so on, but what if you found an investment strategy that just does the job for you without you having to spend hours and hours stuck to an Excel spreadsheet?
A few of my personal favorite ways of doing that are investing in low-cost index funds and also target retirement funds.
So, target retirement funds are generally built in a way the farther you are from that retirement date that you set on the fund, the more aggressive the investment strategies will be. And as you near your retirement date, the investment strategy will become more and more cautious and balanced. So that is one of my personal favorite strategies. That doesn't need to be your strategy. In fact, it very likely might not be your strategy. So do your own research and figure out the strategy. Do the hard work first. Figure out a strategy that works for you, and then just stay the course.
And here's a bonus myth for you, which is you need to be invested in X, and that X could be gold. The X could be crypto, the X could be real estate. There are a lot of people who will tell you that your investment strategy needs to include gold or real estate or cryptocurrencies and so on.
Now, the thing is your personal finance is about you.
If you don't understand something, it's not going to work out very well by you investing in that. In fact, if you don't understand the asset and you are putting your own money towards it, it's not investing it's speculating and speculating doesn't really end very well for most people.
So don't be bogged down by, should, must investment strategies. Understand yourself, understand what your interests are, and stay the course by doing that.
If you enjoyed reading this, you might enjoy our money quiz.