Few business activities are surrounded by as much misinformation and misunderstanding as an investment. It’s the cornerstone of global economics and covers everything from small-time investment in bricks and mortar businesses to multi-million deals. However, despite its ubiquity, many see it as an inaccessible activity. Due to the perceived pressures, many people avoid getting involved with investment even though they have the means to do so. And others get involved with entirely unrealistic ideas in mind, without hiring a budget analyst, and end up disappointed that things don’t turn out the way they expected. We’re going to look at a few of the most common investment misconceptions, telling you everything you need to know before you get involved with investing.
1. Investing Is Just Like Gambling
Hollywood often falls into the trap of portraying investment as some kind of casino game, where everything comes down to luck. Wins are big, and losses are devastating. This idea has permeated popular perceptions of investment since the Wall Street Crash and further back into the Gold Rush eras in Australia and the USA. In reality, solid investment is far more of a science than art or game. Successful investors aren’t running on gut feelings. They approach investment as a science, an activity that demands solid research before any money is put on the table. Many people do actually approach investment as a gamble, and they’re generally the ones that come off worst. But sensible, measured investment has the ability to reap real rewards.
2. Waiting for the Big Win
Another massive misconception, much in line with the gambling mentality, is that an investor simply needs one big win to make it. Some people think that they can put enough money in the right place on one single occasion and make enough money to sit back for the rest of their lives. In reality, if you take investing seriously, it’s an ongoing and long-term activity. Most of the money you make from relatively low gains will need to be put straight back into future low-risk investments. Not only aren’t immediate, massive gains actually mostly go against the general guiding principles of successful investments. A modest but constant stream of profits gives you the time and space to continually adapt your investment strategies, changing direction depending on the economic climate. This is far more valuable than simply throwing pennies down a well while you wait for your big win.
3. Pack in the Day Job
Stories abound of people who win the lottery, quit their day jobs, and quickly go to seed. The same applies to investing. For starters, the odds of you immediately making enough money to depend on investments as your primary income are tiny. It’s far more likely that, if done well, investment can become more of a second salary, an ongoing top-up to your bank balance that provides you with the freedom to expand your future investments. Even if you make double your salary in a single month, you should still ensure that you hold on to whatever your current career is. Investing is a great way to bring in additional income, but by its very nature, it’s dependent on forces that are to some extent beyond your control. Especially when you start out, it’s crucial that you see investing as a sideline rather than your primary source of money. By working and investing at the same time, you can maintain a balance while creating two safety nets in case of unexpected events in the future. That way, if you ever need to find a company for a new job, you’ll have enough income to sustain yourself during the interim.
4. Stocks on Sale Are Always a Good Bet
Purchasing stocks on sale has been the bread and butter of many successful investors. The goal of investing is to buy low and sell high. And sale stocks are about as low as you can get. However, it’s dangerous to get into the mindset of assuming that every single stock on sale will bring you unexpected riches. In reality, many of these stocks are on sale because they’re practically worthless, and their owners see no value in holding onto them. Putting them out at the bottom of the barrel prices is simply a way of easily disposing of them. While there are obviously plenty of opportunities to be had by picking up the right sale stocks at the right time, your money is often better spent on more moderately priced stocks that actually have a much better chance of rising in value. Good companies, really good companies, can usually level out and bring the discount stock up to a higher value.
5. Index Investing Is the Scientific Route
While we’ve warned of the dangers of gut instinct when it comes to investing, index investing actually takes us too far in the other direction. Index investing is based on the idea of following a reliable economic index and making your investments depending on a set of mathematical rules tied to that index. Index investing does definitely have some advantages. It rules out the kinds of risky moves that can happen when investments are run under active management. That said, many people place far too much faith in the apparent science behind index investment. In reality, index investing is directly tied to markets, and the idea behind index investing depends on markets going up. Sadly, this isn’t always the case. Unexpected recessions, depressions, and crises can all have a massive effect on global markets, instantly slashing your projected returns from your index investments. They’re fine in moderation, but if your entire strategy is relying on them, it’s probably worth coming up with a new approach.
Successful investment isn’t an easy business. At the same time, in this day and age, it is an incredibly accessible business. Numerous apps and websites, that let pretty much anyone get involved with financial investments, are available. At the same time, our global culture is full of stories and images of the big winner and the lucky bet. As a result, many people find themselves coming into the world of investment with little more than a romantic idea and a lot of hopeful expectations. This article has endeavored to unravel some of the more common misconceptions in the world of investment and give you a more solid idea of the realities. Solid financial investments can change your life and become a thriving second business rather than a hobby. But at the same time, without realistic expectations, you’re guaranteed to set yourself up for failure.
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