Seven investment myths
June 08, 2020
5 minutes to read
1. You need to be loaded to invest
You don't need to have a lot of money in your account to start investing. Investing has never been more accessible: you can start investing periodically from €25 a year. That's just seven cents a day.
By investing periodically, you invest a sum of money each year (or every month, two months or quarter) in one or more funds. A fund is a basket of shares and/or bonds that is managed by a professional team. In this way, you can invest indirectly in a series of shares and (government) bonds with modest amounts.
2. You need to follow the stock markets to buy and sell in time
In the short term, the stock markets rise and fall constantly. By the day, by the hour, by the minute and by the second. Despite these continuous fluctuations, the stock market trend over time is upwards. Even when you factor in the biggest shocks (from the crisis years of the 1930s to the financial crash of 2008), there is a clear upward trend from a historical perspective. This is apparent from research from Credit Suisse, for example.
You invest in order to achieve a potential return in the longer term: 5 years, 10 years, 20 years, etc. This means that you don't have to keep track of the price charts every day, as that only leads to impulsive buying or selling. And you don't normally need to buy or sell investments every day. Patience, self-control and consistency are crucial when investing.
The other extreme of not looking at your investments for a period of 5, 10 or 20 years is not good either:
- Your risk appetite may increase over the years, for instance, if you receive an inheritance and consequently have more financial scope to invest.
- Your risk appetite may also fall (as you approach retirement age, for example).
- Your investments may become unbalanced over the years. This may happen if your shares or equity funds have performed well and you have amassed too much risk in your portfolio as a result.
- Investment themes may become obsolete, or new opportunities may arise.
So, it's all about striking the right balance. Don't adjust your portfolio too much, but not too little either. For most investors, it may be enough to analyse their portfolio four times a year and take action if needed.
If you would prefer to have your investment portfolio managed by a team of experts so you don't have to worry about it at all, this is an option too.
3. Investing is gambling
Investing is not the same as gambling or speculating. Investors make their capital available to companies or governments as an investment. Investors do not want to make a profit tomorrow, but they invest purposefully for the long term in order to achieve a potential return. Speculators often only want to profit from a fluctuation in the market. Speculation is therefore extremely risky and actually has little to do with investment. What's more, short-term exchange rate fluctuations are almost impossible to predict.
4. To invest, you need a degree in economics or finance
You don't need to be a specialist to invest. But it is important that you understand what you are investing in and are able to weigh the benefits and risks of an investment so that every investment is always in line with your objectives. You should not therefore invest in products that you don't understand or that are not compatible with your risk appetite. Investing always involves some risk, because your capital is not protected.
5. You should only start investing when the stock market has fallen sharply
Whatever supercomputers or Nobel Prize winners might claim, nothing or no one can predict the stock market in the short term. That makes it difficult for investors. It would, of course, be preferable to start investing if the stock market is going to rise for a long time. And you would prefer to cash in your profits just before the stock market enters a downwards trend for a long time, too. Unfortunately, there is no tried-and-tested method to increase your chances of picking the ‘right’ time to buy or sell investments.
A trade war, the outbreak of a virus, political landslides... uncertainties abound. And they are therefore part and parcel of investing. Yet the uncertainties that may now prevent you from investing may prove to be negligible or totally irrelevant in the longer term. And opportunities could even be lost by waiting for the right time.
As such, delaying a decision to invest doesn't make your decision to start investing any easier. All it does is make your investment horizon and the period in which you can achieve a potential return shorter. If fear of timing holds you back from starting, periodic investments could be an option for you.
6. I'm too old to invest
You should only invest money that you won't be needing for a longer period. You need this long horizon to give your investments the time to recover if there is a period of turbulence on the markets, such as the 2008 financial crisis or the coronavirus crisis in 2020. If you expect to buy big-ticket items in the coming years, such as a new car or a house, you probably shouldn't invest that money.
You can, however, invest at any age. And when you are younger, you have an important advantage on your side: time. With a very long investment horizon, you may opt for dynamic investments, such as shares or equity funds. Generally, shares (and equity funds) are higher risk than bonds (and bond funds). At the same time, the potential return is greater. Although the peaks and troughs may be sharper in the short term, the expected returns are higher.
As you get older, it may be interesting to swap some of your dynamic investments for defensive investments. Although the potential return is lower, so is the level of risk. You should always keep in mind that a full stock market recovery can take several years, and this isn't usually a problem when you are younger.
Young and old are relative concepts, of course. Especially as our life expectancy increases. This means that your investment horizon may be longer than you might expect. A commonly used rule of thumb is the 50-50-50 rule: if you are 50 years old, keep 50% invested in shares or equity funds and 50% in less risky investments (cash, real estate, bonds).
7. Investing is expensive
Many Belgians do not invest because they think the costs are too high and the returns are therefore low. It is true that some banks charge high buying, selling and custody fees. You should therefore choose a bank that charges low fees. It is free to open a securities account with Keytrade Bank. There are no custody fees to pay, nor are there any annual charges. All our fees and charges are set out for you here.