Investing is simple but not easy.
Investing in stocks is one of the best methods for growing your wealth over time, and it’s important to not let myths scare you out of it.
The information available can feel overwhelming at times, but you also have to differentiate between facts and falsehoods.
Here are five common investment myths that should not deter you from investing.
1. Investing is only for the rich
A persistent misconception is that investing is the privilege of the rich.
That may have been true many decades ago when lot sizes were larger and commissions were prohibitively expensive.
Companies on the local bourse used to have lot sizes of 1,000, meaning you had to purchase a minimum of 1,000 shares for each transaction.
For blue-chip companies such as United Overseas Bank Ltd (SGX: U11), or UOB, this meant forking out a steep S$25,800 for one lot of shares, based on its last traded price of S$25.80.
However, in January 2015, the Singapore Exchange reduced the board lot sizes from 1,000 to 100 shares.
With this reduction, you only require S$2,580 to purchase one lot of UOB.
US-listed shares are even more affordable as you can purchase just one share of a company (i.e. there is no minimum lot size).
Large reputable companies such as Starbucks (NASDAQ: SBUX), Apple (NASDAQ: AAPL) and Visa (NYSE: V) cost just US$109.38, US$123 and US$216.86 apiece, respectively.
Transaction costs have also declined significantly over the years, with international brokerages such as Interactive Brokers (NASDAQ: IBKR) charging a minimum of US$0.35 per order.
Newcomer Tiger Brokers, part of Up Fintech Holding Ltd (NASDAQ: TIGR), charges just 0.08% of the trade value for Singapore stocks and US$0.01 per share for US stocks.
2. Investing is too risky
Another common misconception is that investing is fraught with risk and that it is very easy to lose your hard-earned money.
But think about this fact though: if you leave your money in a bank account, it will almost surely get eaten up by inflation.
Parking your money in a bank account over the long time is an equally risky option as you are almost certainly going to see the value of your money eroding over time.
Proper financial education and a prudent mindset will allow almost anyone to invest without taking on undue risk.
3. You need to know when to enter and exit the stock market
I can safely conclude that no one, yes not even the “experts”, has been able to successfully and consistently time the market.
Not that you need to know how to do so.
Investing represents part-ownership of companies.
And a basic tenet of investing is that as the business improves, the share price will naturally follow.
Hence, all you need to do is to own a basket of great companies within your portfolio and just hold on to them over the long term.
As their profits and dividends grow, you will enjoy both capital gains and a steady stream of passive income.
4. Higher risks mean higher rewards
There is an implicit assumption that to enjoy better rewards, you need to take on more risk.
But first, let’s take a step back and define what “risk” means.
Risk means the probability of a permanent loss of your investment capital.
Thus, a higher level of risk implies that there is a higher chance of losing your capital.
Investing in strong, stable companies can yield bountiful rewards for the patient investor. The chance of a permanent loss of capital in such businesses is lower.
Therefore, it is not true that higher rewards come with higher risk. The converse is true.
You can enjoy rewards even when taking a low or moderate level of risk.
5. Large, reputable companies cannot fail
This final myth probably takes the cake.
Investors who automatically assume that large, reputable companies cannot fall fail to appreciate the role of competition and economics in the business world.
Take the case of Hyflux Limited (SGX: 600), a once high-flying wastewater treatment company.
The high-profile company was once worth as much as S$2.1 billion, but in 2018, it fell on hard times as it became insolvent.
Its shares have been suspended since then as the firm was recently placed under judicial management.
Another big name on the local scene, Sembcorp Marine Ltd (SGX: S51), saw its share price tumble from around S$3.70 back in March 2011 to just S$0.18 in a decade.
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Disclaimer: Royston Yang owns shares in Starbucks, Apple and Visa.