The financial world can seem daunting, especially when markets are volatile. But in reality, you don’t need a degree in finance to be a confident investor throughout the ups and downs of market cycles. I’d like to break down four of the most common myths about investing and offer a different perspective for each of them.
Myth #1: The stock market is a game, and you need to pick “winners” to see results
When people learn I’m a financial adviser, they usually ask me which stocks they should buy. And they’re surprised when I reply, “All of them!” They may not realise it, but my three-word response is a short version of Vanguard’s time-tested investment principles: Use diversification to balance out your risk.
When choosing investments, instead of trying to predict which individual stocks or bonds will be winners, you can opt for a broad-market mutual fund or exchange-traded fund (ETF) and invest in thousands of them all at once. Evidence shows that most of the stock market return comes from a small number of shares1. However, picking those shares in advance is really hard. That is why buying them all has proven to be a successful strategy. Following a diversified approach also helps balance your risk, because economic conditions that cause one stock to perform poorly may cause another stock to perform well.
Myth #2: You need to get in at the right time because the stock market is volatile
Nobody—not even financial professionals like me—knows for sure what the market will do. That’s why investors often fare better when they don’t try to time the markets. The best and worst trading days often occur close together. So if you try to avoid falling share prices, you just might miss out on some of the strongest trading days.
The 20 best and worst trading days
Source: Vanguard calculations, based on data from Refinitiv using the FTSE All Share Index. Data between 1 January 1985 and 19 January 2022 in GBP terms.
The most important thing to do is to look at the big picture. Are you still comfortable with your mix of investments? If so, it’s best to stay the course and keep a long-term perspective.
Myth #3: You need to keep up with financial news
A friend recently asked me what I do when companies announce their earnings. Do I hold? Or sell, and plan to buy again later? My response, as an investor, is, “I don’t do anything”. Market events, like a company announcing earnings or paying dividends, have little to no effect on my long-term investment goals, so they don’t affect my strategy. Your investment selection and portfolio strategy should be made based on your life and your investment goals, not on what’s happening in the markets day to day.
Familiarising yourself with some investing basics can help you put market events in perspective and may make you feel more comfortable as an investor. Keep in mind that a lot of what’s in the news is just noise and ignoring it doesn’t mean your returns will suffer. Instead of trying to adapt to what’s happening in the market at any given time, ask yourself, “What mix of investments am I comfortable having, given the time I have to reach my goal?” If you’re not sure, learning more about asset allocation and diversification can help you decide.
Myth #4: You need a lot of time to research shares and make frequent trades
Investing isn’t supposed to be flashy or exciting like a casino. The truth is, investing the right way is actually a little bit boring. Once you’ve put your investing strategy in place, there shouldn’t be a lot of day-to-day activity. You just need to check in periodically and make any adjustments needed to keep your plan on track.
Time spent researching stocks, making frequent trades, and trying to time the market rarely has the return on investment some might expect. In fact, the odds are against you when it comes to market-timing. But while timing the market doesn’t produce returns, time in the market typically does. Instead of asking when you should buy and sell, ask yourself if you’re invested appropriately for your financial goals and if you’re saving enough on a regular basis.
1 Source: Vanguard Research: “How to increase the odds of owning the few stocks that drive returns”, February 2019, C. Tidmore, F. M. Kinniry, G. Renzi-Ricci; E. Cilla.
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