While investing is a continuous financial journey, understanding the basics and starting with strong fundamentals can set you up for success. Here is a look at some common misconceptions about investing and how you can reframe your thinking:
Misconception #1: Investing is like gambling
Pop culture often portrays investing as a fast-paced, high-risk thrill ride. This narrative fuels the long-held belief that successful investing solely involves day trading and playing the market odds for quick profits. For some, this portrayal may seem similar to gambling and can scare them away from investing or lead them to invest in high-risk and unsuitable opportunities.
Though all investments carry some degree of risk, planning an investment strategy with long-term goals vastly differs from gambling for three main reasons:
- Time horizon vs right now: Gambling focuses on immediate results while investing takes a long-term view of growing money over extended periods of time through compounding interest. Emotions and adrenaline shouldn’t dictate investment decisions. With a financial plan in place, investors can approach investing in a mindful and strategic way.
- Informed choice vs chance: Long-term investing considers crucial financial information about the stock, company or fund. You can study a company’s earnings reports, products and services, and leadership before committing to investing your money. In contrast, gambling is simply betting your money on the odds and a healthy dose of luck.
- Ownership vs all-or-nothing: When you invest money into buying a stock, mutual fund, or ETF, your purchase gives you partial ownership of a company. The return on your investment is never an all-or-nothing scenario like in gambling. Investments can deliver returns in the form of interest, dividends, or capital gains. Diversifying your assets to include low-risk options like GICs, bonds, or a basket of investments through a mutual fund or ETF can further help manage risk
Misconception #2: Investing is only for the rich
This is by far the most common barrier to investing. According to CIRO’s 2024 Investor Survey, six-in-10 non-investors identified not having enough money to invest as one of the things holding them back from investing. For many Albertans, finding room in your budget for investing may seem like a privilege. But modern-day investing has come a long way and is much more affordable.
Gone are the days of expensive stockbrokers and minimum investment requirements. Thanks to advancements like robo-advisors, low cost brokerages, fractional shares and ETFs, you could start investing with as little as $1. Today, the ability to start investing has minimal financial barriers.
An interesting statistic from Ramsey’s 2024 National Study of Millionaires showed that most U.S. millionaires did not inherit any money from their parents or family members. According to the survey, eight out of 10 millionaires came from middle-income or lower-income families. In the same study, three out of four millionaires stated regular consistent contributions lead to success.
Even small investments are worthwhile! Investing can start with small amounts based on your budget and increase as you earn more or are able to allocate more towards your long-term goals.
Misconception #3: It’s too late to invest
The goal of any investor is to maximize profits and earn the best return on their investment, while staying within their risk tolerance and time horizon. A longer time horizon allows your money to compound and grow over time faster. But, this thinking can lead some to believe they’re too late to invest or need to take on excessive risk to catch up.
This isn’t the case. Three key lessons that are critical to your success as an investor involves understanding:
A financial plan: Regardless of age, having a financial plan in place can help you consider realistic goals and accurate timelines for when you can achieve them. Certified financial planners can help you create an action plan taking into consideration your age, current financial obligations, and risk tolerance.
Time in the market: Time spent invested and in the market is generally better than time spent staying on the sidelines. Remember, the power of compound interest works regardless of when you start investing.
Risk and return: Taking on more risk doesn’t guarantee a higher return. Know your personal risk tolerance. This will help ensure you choose suitable investments aligned to the risk you are comfortable taking.
Like the ancient Chinese proverb, the best time to plant a tree was 20 years ago. The second best time is now.
Common misconceptions can skew how you view and approach investing. With a measured approach and a strong foundation backed by investing principals like diversification, risk vs. reward and compound interest, you can start your investing journey on the right path today.
