In Part 1 of this series on investment myths I exposed 5 commonly held beliefs about investing that are preventing many people from making as much money as they could with their investments. They are:
The stock market must go up to make money.
Stock market investing is risky.
Over 20 years the stock market always goes up.
The best way to make money in stocks is to buy and hold.
News and research groups have the hot stock picks.
I dispelled each of these myths and explained that they are the result of miseducation. The problem with miseducation is it leads to false understanding of the truth, and as many people have learned over the last year in the world of investing, not knowing the truth can be financially devastating.
In this article I am going to expose 5 more myths about the world of stocks and investing and share with you how you can not only correct your mistaken understandings but also profit from your new knowledge.
Myth #1: Investing in Stocks is Like Gambling
The myth that investing in stocks is like gambling is one of the oldest, most pervasive myths surrounding the stock market. In fact many people do not even realize they hold this belief. Yet unknowingly it appears in their words when they say things like, “You’re betting the stock will go down” or “You’re betting the stock will go up.”
The idea that a smart investor is betting is ludicrous. Yet it has crept into an uneducated public to the point that many religious groups and social networks opposed to gambling have led their followers to believe the stock market is so riddled with gambling one would be better off playing the lottery. In fact nothing could be further from the truth.
The real fallacy here is the assumption that the investor is betting. As one who spends his life in the investment community, let me assure you no smart investor would ever bet. Betting is the exact opposite of what investors do. Investors spend their life learning and educating themselves about the investment they are about to make. Then they proceed to invest, trusting that their education was correct. If the investment goes against the investor, the honest investor still will not say, “I bet wrong.” The honest investor will say, “What can I learn from this?”
Anyone who proceeds into any area of life without being properly educated could be seen as a gambler. But the more appropriate term would be foolish. To illustrate this point, let’s take a person learning to drive a car. If the person has never ever driven a vehicle before, they may assert, “Since lots of people do it, so can I.” But the foolishness comes when the person gets behind the wheel of a car and attempts to drive without first learning anything about driving a car. We could easily say that this person was gambling with his life, but the truth is it’s simply foolishness.
Investing in the stock market is the same way. Millions of people hear how large amounts of money are made in the market. They see ads on television for cheap stock brokers, and one day think, “I can do that too.” Truth is they CAN do it too-but only after they learn HOW to do it. For the educated investor, putting money into the stock market is an educated, analytical, thoughtful decision. And yet for the uneducated investor doing the same action is… well, foolish. Becoming educated first is the best way to successfully invest in the stock market. Myth: BUSTED
Myth #2: “Predicting” the Stock Market Is Impossible
On the heels of the assumption that investing in the stock market is gambling comes a follow-up myth: “Predicting the stock market is impossible.” Again this fallacy comes down to the lack of education. For YOU to predict the stock market may be impossible, but not specifically for every person. In fact since the beginning of the stock market many investors around the world have successfully “predicted” the next moves. The author of this article is one of them (that would be me!). Predicting the stock market is not nearly as mystical as one might think. In fact the market moves in very predictable, repeating patterns, over and over again. And once a person is trained to watch and recognize those patterns, that person can also predict the next move with reasonable certainty. Myth: BUSTED
Myth #3: Mutual Funds Are the Safest Way to Make Money in the Stock Market
I suppose to dispel this next myth one must define what “safe” is. My definition of “safe” in regards to investing is an investment that has the ability to be profitable, not because of market conditions but in spite of market conditions. In other words, if the market goes up, I want an investment that can make money. If the market goes down, I want an investment that can make money. Yet mutual funds are not one of those investments. It boggles my mind as to why financial advisors continue to sell these investment vehicles to unknowing would-be retirees. It’s an investment that can ONLY make money if the market moves higher. And to cover the weakness of the investment the sales pitch goes like this, “Over 20 years the market always goes higher…” Well what if I need to retire in 19 years and that’s not an up year?
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