Are these investing myths holding you back from building wealth?
Today, I’m debunking some common myths that may be costing you the chance to make some major money through investing.
And if you want to learn about investing the RIGHT way, be sure to check out our free masterclass on making money as a first time investor.
Investing Myth #1: You need to pay off ALL your debt before you start investing
Contrary to what you may have heard, not all debt is bad. You can use a loan to finance something that offers a good return on investment, such as a mortgage. And it is possible to make money on investments while you’re paying off debt.
You don’t need to pay off ALL your debt before you invest, just high-interest debt, meaning debt with an interest rate at or above 7%. Let me explain.
On average, high-return investments like stocks offer an 8-10% return. So, if you have debt with an interest rate higher than 7%, there’s no point in investing because the cost of your interest is more expensive than the returns you’ll likely get by investing.
Alternatively, if you have debt with a lower interest rate – like a mortgage or a student loan with say a 4% interest rate -- you don’t have to pay it off completely before you start investing.
The reason for that again comes down to the average returns of the stock market. Since historical returns have been 8-10%, you’re actually better off paying off your debt slowly over time and investing simultaneously.
To sum it up, if you have debt with an interest rate above 7% – like credit card debt – then pay it off before you start to invest. If your debt has an interest rate below 7% – like a mortgage or car loan – then go ahead and start investing while you pay off that debt over time.
If you need some help paying off high-interest debt, check out our free masterclass, Say Goodbye to Credit Card Debt Forever. In it, we teach you all the principles you need to pay off debt so you can start building wealth.
Investing Myth #2: Investing is risky
There is a certain amount of risk involved in investing, but it isn’t a game of blind chance or dumb luck. There are strategies that you can use to protect yourself from the fluctuations and dips in the stock market.
If you want to minimize your investment risk, then first of all, don’t invest in single stocks. Instead, choose to invest in index funds, mutual funds, or ETFs, which are bundles of different stocks. So even if some of the companies don’t do as well as expected, you don’t end up losing a lot of money because the other companies will help balance it out.
Also, make sure you aren’t only invested in stocks. Having different types of investments, such as real estate or bonds will help you minimize risk.
I highly recommend investing in target date funds. Target date funds will automatically adjust your investment portfolio as you get older, so you make more aggressive, higher risk investments when you’re younger and more stable, lower risk investments as you get older.
Investing Myth #3: Investing is a way to get rich fast
If you’re looking to get rich quick, play the lottery. (But don’t actually, it’s a total waste of money!)
The truth is, there aren’t a lot of ways to get rich quickly. Even the richest people get rich slowly, by starting successful businesses, working really hard, or getting lucky.
If you want a solid strategic plan to multiply your money over the course of your life, then invest.
Investing is a long-term way to build wealth. It requires discipline, patience, and holding the course, and it rarely happens overnight! But as long as you do it strategically, it is a guaranteed successful way to multiply your money.
Investing Myth #4: You should time the market
It is possible to time the market. Day traders, portfolio managers, and full-time investors do it all the time. However, few investors have been able to predict market shifts with such consistency that they gain any significant advantage over the buy-and-hold investor.
Furthermore, it is a high-stress and high-risk strategy. Bank of America did a study evaluating the stock market all the way back to 1930 and discovered that if an investor missed the S&P 500′s 10 best days each decade, the total return would stand at 28%. If, on the other hand, the investor held steady through the ups and downs, the return would have been almost 18,000%.
Historically, the stock market has always gone up over time, so you can make more money – with less stress – by holding your investments for 5+ years than by trying to ride the highs and lows of the stock market.
I mean, that’s kind of how everything in life is, right? It’s better to just get started than wait for the “perfect” moment. So, instead of trying to time the market, make a plan and invest as soon as possible.
Investing Myth #5: A diversified portfolio means buying a lot of different stocks
If you’ve done any research into investing, you’ve probably heard about the importance of a “diversified” portfolio. But what exactly does that mean?
It’s easy to assume that a diversified portfolio means just investing in a lot of different stocks. But actually, a truly diversified portfolio is a little more complex.
The first thing to keep in mind is asset allocation. This refers to buying a lot of different types of investments: stocks, bonds, real estate…it involves balancing your portfolio with investments that are inherently less risky.
You also want to diversify the sectors or industries that you invest in. For example, instead of investing in just technology, look at other industries, like retail or pharmaceuticals.
Given all of those factors, and the fact that you probably aren’t an expert in certain assets or sectors, one easy way to get diversification is through index funds.
Index funds invest in stocks that fit into a specific category of the market. For example, if you invest in the ETF SPY, which tracks the S&P 500 index, you'll be invested in the 500 largest companies in the US.
By choosing a small handful of different index funds – like a US stock market index fund, an international stock market index fund, and a bond index fund – you can create total diversification by only investing in three different funds.
Or you can invest in one: a target date fund, which allocates your money across stocks and bonds based on your age and automatically adjusts the asset allocation over time as you get older to lower the risk.
Investing Myth #6: Investing is for the rich
We tend to think of investing as something that rich people do. And they do, but people don’t invest because they’re rich; they become rich by investing.
Most millionaires have multiple streams of income.
Plus, with micro-investing apps and online brokerages, investing is more accessible than ever. As long as you don't have high-interest rate debt and you've saved up your emergency fund, you can get started investing with as little as $100. And the sooner you get started, the more time you have for your money to compound over time, meaning you'll become rich by investing!
Want to become a successful investor?
Investing is one of the best ways to build wealth…but only if you do it the right way. If you want to learn more about how to invest like a millionaire, be sure to check out our free masterclass, Think Like an Investor, where we’ll teach you everything you need to know to start making money by investing with confidence.
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