Bodies are packed wall-to-wall, noise reverberates off the walls. Fists pump in the air as lights flash. Where are we?
We are at the imaginary Wall Street, the media-hyped center of buying-and-trading. However, this old school idea of investing– the shouting people, frantic hustle, slew of papers– perpetuates several myths that discourage people from managing their money effectively.
Myth 1: Investing is for financial experts only
With the dazzling display of numbers scrolling across television stations, an impossible amount of funds to invest in, accounts to open, and spending to keep track of, people would rather leave investing up to an expert. Our idea of financial experts are savvy pros who craft the perfect plan, buying and selling confidently. However the truth is that as a DIY-investor you could choose a single index fund– a diversified, low cost way to invest in multiple companies at once– and still do much better than your neighbor with their financial advisor on call.
In fact, in a 1 million dollar bet, Warren Buffet made the same claim. He bet that over the course of ten years, the S&P 500 would outperform actively managed funds. He won the bet by a huge margin, with the S&P 500 returning an average of 7.1% while the actively managed funds returned 2.2%. In 2013, Portfolio Solutions and Betterment wrote a paper analyzing the difference and found that index fund portfolios outperformed actively managed portfolios 82% to 90% of the time. In this technological day and age, we have the tools and information we need to manage our own money.
Myth 2: Buy low sell high
The mantra of investing, repeated over and over, should be tossed out the window. It is a gambler’s game to buy and sell stocks this way. Of course, the advice is correct, you should buy low and sell high, the problem is that even financial experts can’t predict what the market will do in the short term.
Instead, continue contributing to a simple portfolio of passive index funds and ignore the news. Tune out the hype. Do not wait for a dip in the stock market to start investing. The best time to put your money in is now. If you have a long investing horizon, the short term performance does not matter to you. By buying now, you will most likely be buying at a historical low point, and later you will be selling at a higher point. Time in the market beats timing the market.
Buy low sell high needs a rebrand: Buy now, sell later. It’s as easy as that.
Myth 3: Investing is gambling
This erroneous view is misinformed, and perpetuated by those who believe myth #2. Unfortunately, it holds back a lot of people from investing. While there are ups and downs in the market in the short term, over a long time horizon the trend of the US stock market has always gone up.
In truth, gambling is a no-win venture. The odds are stacked against the player. Unlike gambling, when you invest you are buying a share of the company or companies. This is the primary vehicle for saving for retirement. Putting your money under your mattress will almost guarantee a loss, as inflation will drain your money’s worth. For the short term, hold 3-6 months of cash for emergency situations, but give your money the chance to compound and grow.
The key element goes hand-in-hand with the previous myths— if one puts money into a passive fund and employs a buy-and-hold strategy, investing is not like gambling at all.
It’s time for investing to rebrand.
Forget about the suits clamoring in a foolish concerto. Sit at the coffee table, with a blanket draped over your shoulders, Spotify playing Muse in the background. Sip a cup of coffee as you click Buy and take ownership of a tiny piece of the economy. Relax knowing you have a long time for your money to grow. Close your laptop, ignoring doomsday articles about an economic meltdown or a video about the kid who just bought a Lamborghini from selling her Bitcoin. Your investing isn’t about the frantic pace, missed opportunities, or regret. It’s about your long term financial success.