Investing — a word that elicits both excitement and trepidation.
For every Warren Buffet success story, there are numerous tales of investments gone awry.
Investing might seem like a high-stakes game shrouded in mystery, especially if you're new to it. With so much information out there, it can be hard to know what's true and what's not.
But before you write off investing as something reserved for the highly intelligent or the financial elite, let's debunk some of the most widespread myths that frequently deter potential investors from venturing into the financial waters.
Myth 1: Always Buy the Dip
Buying the dip is a common mistake in the stock market, where investors purchase shares solely because prices have declined from previous highs.
This can be a good strategy if you're confident that the stock will eventually rebound. However, it is crucial to conduct thorough research, understand the reasons behind the stock's decline, and assess your own risk tolerance.
Matthew Booker, a fund manager and co-founder of Spheria Asset Management, advises against attempting to "catch a falling knife." In his words to the Australian Financial Review, he emphasises the importance of understanding the reasons behind a stock’s decline: “In business, things change, so make sure you know why something’s falling. Just because a company’s share price has fallen doesn’t mean its good value.”
This principle applies equally to lots of other investments too, including real estate.
Myth 2: You Need Lots of Money to Start
Contrary to common belief, a substantial fortune is not a prerequisite to start investing.
With modern share investment platforms and fractional shares, even a modest amount can kickstart your investment journey.
Think of KiwiSaver, subject to loose criteria, everyone must be enrolled into it when they start working in New Zealand.
Sure, investing carries inherent risk, but so does holding all your funds in a savings account. Over extended periods, if you persist in saving in a bank, inflation will steadily destroy the real value of your savings.
Diversifying your portfolio, conducting thorough research, implementing a clear strategy, and adopting a long-term approach to allow your money to grow and compound, are effective measures to mitigate the inherent risks of investing.
Myth 4: You Need to be Smart or an Expert to Invest
The idea that investing is exclusively reserved for financial experts or the highly intelligent is false.
Renowned billionaire Warren Buffett asserts, “you don’t need to be a rocket scientist” to invest.
According to Buffett, "success in investing doesn't correlate with IQ once you're above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing."
Aside from KiwiSaver Schemes, another straightforward and effective way to start investing without the need for expert stock-picking skills is to invest in index funds. These funds track the performance of the entire market or specific sectors, offering a simple entry point for investors.
Myth 5: Monitor Your Investments Daily
There's no need to check your investment portfolio daily. It is important to note that frequent monitoring is unnecessary. In fact, it can be detrimental, as it may lead to making impulsive, emotional decisions.
"The most important quality for an investor is temperament, not intellect,” Buffett emphasises.
“You need a temperament that neither derives great pleasure from being with the crowd or against the crowd."
Instead of daily monitoring, focus on developing a long-term investment plan and periodically rebalancing your portfolio.
Myth 6: You Need to Time the Market to Be Successful
The notion of perfectly timing the market is, in reality, nearly impossible.
A study conducted by Morningstar revealed that timing the market accounts for only a fraction of the returns of successful investors. Repeated similar studies have illustrated the same point, and the difficulty of getting this right.
Investing consistently and holding onto your investments through market fluctuations often leads to more favourable outcomes.
Buffett advises investors to “only buy something that you'd be perfectly happy to hold if the market shut down for 10 years”.
It's time in the market, not timing the market, that counts.
Myth 7: The S&P 500 Consistently Yields 10% Annual Return
The S&P 500, serving as the foremost global investing benchmark, comprises the top 500 companies listed in the largest market, the United States.
The S&P 500 has a reputation for strong performance, but that doesn't mean it guarantees a 10% return every year.
“While 10% might be the average, the returns in any given year are far from average. In fact, between 1926 and 2022, returns were in that ‘average’ band of 8% to 12% only seven times. The rest of the time they were much lower or, usually, much higher. Volatility is the state of play in the stock market,” Dr James Royal wrote on NerdWallet.
It's essential to have realistic expectations and acknowledge that market fluctuations can significantly impact your returns.
Myth 8: The Only Way to Build Wealth Is by Buying a Home
While owning a home is the ultimate Kiwi goal, it's not the only path to building wealth.
While homeownership can offer stability and certain tax advantages, it may not always be the best financial decision.
If you don’t plan to reside in the house for at least five years, you may not have sufficient time to build equity and could incur losses in the event of a property market decline, should you decide (for whatever reason) to sell.
Additionally, it is essential to factor in the various costs associated with homeownership, including mortgage payments, rates, insurance, and maintenance. These costs can add up. It’s best to ensure you can afford them before buying a home.
In fact, focusing solely on your own home may limit your financial opportunities.
There are alternate ways to invest and build wealth, such as investing in stocks, establishing your own business, or even an investment property – each offering distinct advantages compared to the sole focus of buying a home.
With 185 companies listed on the NZX main board, the New Zealand stock market, while relatively small, still offers viable investment opportunities.
Historically, the NZX has performed well, even outperforming major exchanges at times, including the S&P 500 and the Australian Securities Exchange (ASX). Due to the nature of companies listed on the NZX, they also typically offer higher dividend yields than global companies.
While The NZX has lagged international counterparts during recent times, it was once one of the highest-achieving markets in the world.
All told, New Zealand shares are well worth considering as part of a diversified investment portfolio, especially as they aren’t taxed under the FIF regime. This tax advantage provides New Zealand shares a significant edge, requiring international shares to outperform them by about one percent annually to offset their tax disadvantages.
Myth 10: The Best Way to Get Ahead Is Owning a Small Business
While it’s true small businesses can be very successful, many fail.
According to Stats New Zealand, 50% of small businesses close within four years, with only 30% making a net profit of $50,000 or more, and a mere 3% achieving $500k net profit or more.
A recent study by the small business platform, Xero, titled ‘Money Matters’ found 46% of business owners and 60% of sole traders aren’t paying themselves to sustain their businesses. Additionally, 52% had increased prices to address cash flow challenges.
Bridget Snelling, Xero New Zealand Country Manager, emphasises that cash flow is one of the biggest challenges small businesses are facing.
“When you add in inflation, climbing interest rates and reduced spend from consumers, small business owners are walking a tightrope every day,” says Snelling.
“When small business owners experience cash flow issues one of the first things to go is their own pay, followed by an inability to pay suppliers, which has a ripple effect throughout the economy.
“It’s a systemic and volatile cycle, which sees business owners dipping into their own personal savings, working unattainable hours, and ultimately sacrificing their emotional and physical wellbeing to stay afloat.”
When questioned about the emotional and physical impacts of cash flow management, 80% of business owners reported feeling stressed, 70% were anxious, 60% had trouble sleeping, and 47% had been losing time with friends and family over the past 12 months.
Myth 11: You Must Pay Off All Your Debt Before Investing
The myth that you must pay off all your debt before investing is a common one, but it’s not necessarily the best financial advice.
There are several factors to consider, such as the type of debt you have and associated interest rates.
In instances of high-interest debt, such as credit card balances, it is generally a good idea to prioritise repayment before investing.
However, in cases of low-interest debt, such as student loans or mortgages, it may be reasonable to allocate some of your funds towards investments while also paying off your debt.
Myth 13: Professional Financial Advice is too Expensive
Okay, hear us out for a shameless plug: while there are costs associated with seeking professional advice, consider it an investment in your financial future.
A chat with a financial adviser today has the potential to significantly boost your overall wealth and happiness, help you reduce risks, and of course, may help you avoid falling prey to the myths featured in this article.
Myth 14: “Don’t Invest More Than You Can Afford to Lose”
This cautionary phrase might be thrown around by well-meaning friends or relatives to discourage people from investing money that isn’t “play money”. This is more appropriate advice for speculative investments like meme stocks and most cryptocurrencies, where there’s a reasonable likelihood of losing your entire investment.
It’s applicability to investing in general is questionable. It implies investing is akin to gambling, comparable to betting on sports or races. This myth suggests that money you can’t afford to lose should be kept in the perceived safety of a savings account (where it’ll get eroded by inflation) or perhaps tucked under your bed! Such a viewpoint is unlikely to result in long-term financial success.