It’s natural to fear the unknown when it comes to investing. We have all heard things that make us question whether it’s the right choice for us. So, why haven’t you started investing your money yet? Chances are that your answer to this question is going to be one of the following 9 myths we’re about to debunk for you.
1. I Need to Be an Expert to Start Investing
Before the internet and technology, it seemed that most investors were experts at analysing business financials and valuing a company. Sure, that may have been more so the case decades ago, but today you don’t need to be a professional to start investing. Now you can start investing with little to no knowledge at all with the added help of the internet and technology. But to make sure you don’t make any rookie mistakes, here are a few things to keep in mind…
First of all, you don’t need to do it all by yourself. There are online providers that will set everything up for you based on your needs, abilities and risk tolerance. Not sure what to invest in? That’s no problem because after answering just a few questions, many investment platforms can show you where your money could be invested.
Worried about diversifying your investments properly? Introducing Exchange Traded Funds (ETFs). An ETF is a basket of assets compiled into one group. Each share of an ETF purchases you a piece of every asset in the respective fund. It wasn’t until the internet era that you could purchase one share of an ETF and get a basket full of tens or even hundreds of stocks at once. Your portfolio is naturally already diversified. The great thing is, you can even purchase multiple ETF funds to diversify even more!
2. I Don’t Have Enough Money to Start Investing
Want to invest in Amazon? No problem, you just need two thousand USD to get started (equivalent to about £1,550), that’s chump change, right? Not so fast…
Some of the most popular investments, such as shares in Apple and Microsoft can cost hundreds or even thousands per share. You may think that this rules you out as an investor, but new technological developments are here to save the day.
There are multiple ways in which you can start investing with little to no money. Here are two popular ways that can also be used together:
- Invest in fractional shares: Fractional shares investing means you can purchase partial shares of a company or ETF, rather than having to purchase whole shares. This removes the barrier of having to start with large pots of money. Instead, you can start with as little as £1!
- Invest using an online manager: An online manager is a technology-driven investment company that asks you a few questions about your investment goals. It asks about your investment objectives and your risk tolerance. This is a combination of how much risk you can afford to take on and how much risk you are willing to take on. It then puts together a professionally made portfolio for you. Most online managers have small or no investing minimums and remove the risk of not knowing where to start.
3. I Will Lose All My Money
Major events such as Brexit can cause big market swings. The FTSE 100 lost 8% after the Brexit vote. If you had sold your investments during this timeframe, you would have likely made a loss. However, if you had kept a long-term mindset, you’d have likely regained your losses and probably achieved great returns over time. And, while we’re obliged to say that there is always a chance of losing some or all of your investment, you’re less likely to lose a significant portion of your portfolio if you have invested in a diversified portfolio. This is because investing in different assets that don’t always move in the same direction in the same market conditions mitigates risk versus investing in single stocks or assets.
The reality: “bull markets often follow bear markets…”. A good investment manager will consider these risks and plan accordingly for you.
4. Now Is Not the Right Time to Start Investing
You might be worried about the unknown variables that could affect the performance of your investments. Events will happen, the markets will swing up and down, but in the long run, they have always maintained a long-term upward trend. Fear of the unknown is normal when it comes to investing your hard-earned cash. You have probably heard your friends or the media say things like:
- “What if a recession is about to start?”
- “What if the coronavirus causes my investments to lose money?”
- “What if there is a terrorist attack, or even a war?”
- “What if the sky falls down on me?!”
Ok, the last one is an exaggeration, but you get the point. A long-term mindset is key to overcoming the endless “what if” scenarios you think of. But, did you know that 100% of all recessions have rebounded to higher levels? Don’t believe me? Just take a look at a chart of the history of the FTSE 100 index performance and you will see there has never been a recession that has never rebounded. Keep that in mind and you’ll have peace of mind that your investments are safer for the long run.
5. I’ll Get Rich Quick
Having a “get rich quick” mindset often leads to major financial losses and unmet expectations. Getting rich is a long-term process that is hard work, and rarely happens “quickly.” Some experts say that “to avoid losing money in the markets, tune out the outlandish investment pitches and the promises of riches.” Furthermore, if you try to “time the market” there is a good chance that you will get it wrong. The winning strategy is usually, while more boring, much less simple. As John Bogle said: “Owning the stock market over the long term is a winner’s game, but attempting to beat the market is a loser’s game.”
6. I Need an Independent Financial Adviser (IFA)
Most financial advisors only accept working with people who have hundreds of thousands of pounds or more. In reality, today you can manage all your money with an online manager without having to pay for the cost of an expensive financial adviser. Whether you have millions of pounds or whether you’re just getting started with nothing, an online advisor can provide you with investment services without the need for an IFA, and at a fraction of the price.
7. Big Names Equal Bigger Gains
Did you know that most hedge funds underperform the overall stock market? Sure, occasionally a hedge fund will get it right and shout their returns to the public, but the chances of them maintaining that same growth over time are slim to none. Thus, “Big Names DOES NOT Equal Bigger Gains.”
Consider the HFRI Fund Weighted Composite Index (an index comprised of 1,500 single manager hedge funds globally) in 2019. It had a growth of 10.4% for the year, the strongest since a 20% rise in 2009. However, the S&P 500 which is comprised of 500 of the largest companies in the US had a return of 31.5% for the same year.
Furthermore, even the Barclays Capital Government / Credit Bond Index saw the near same growth as the HFRI hedge fund, at 10.1%. Why is this surprising? Bonds are typically considered safer investments, and hedge funds are considered riskier investments. Thus, big names don’t always mean bigger gains. Sometimes you can invest in bonds and beat the “bigger names” and be in a safer investment!
8. I’ll Get Ripped Off
A valid concern that you might have is getting ripped off from your financial advisor or broker from fees. Let’s face it, the more fees you pay, the less money you will make over time. And that’s not including the compounding effects of that money being in the market over time.
What should you do? To start, remember that online investment providers and online manager investing solutions typically charge much less than traditional investing services. Consider a quick analysis of your advisor or brokers fees. By law, they have to disclose the fees to you, so this may mean reading through some fine print. In short, most fees are either charged as a flat monthly fee, a percentage of your total amount invested, a fee upfront or a fee upon withdrawal.
Looking at all these areas to see where you might be charged will eliminate this fear and save you potentially thousands of pounds. After doing a case study on investing fees, we found that investment fees can cost as much of 10% — 25% of your overall investments, so it is better to be careful and always check the fine print!
9. Taxes Are Going to Eat Up All My Gains
The areas that you will be taxed on from your investments are capital gains, dividend and income. Lucky for you, HMRC have been kind enough to give you some relief and will only start taxing you after you have gained or earned a certain amount. So, assuming you reach these threshold’s, the amounts you will be taxed depends on the length of time you’ve held the investments and your current tax rate.
Here are a few things to consider to help lower or eliminate your tax bill:
- You can claim tax deductions for years that you’ve lost money on your investments, offsetting your overall tax bill in the long term.
- Keep in mind that investing in your ISA or employer’s pension benefits provides tax-free gains, potentially saving you a ton of money in the long run.
- Lastly, consider your total gains in the market vs. your gains should you have avoided investing in the first place. Your net result of investing will almost always be a better return versus avoiding investing altogether.
Tax treatment depends on individual circumstances and may be subject to change in the future.
The Best Time to Start Investing Is Today
When is the best time to begin investing? Just ask the most successful investors of our time and all will tell you the answer is 10 years ago! As Warren Buffet said: “Someone’s sitting in the shade today because someone planted a tree a long time ago…” and this often means overcoming these 9 investing myths keeping you from starting. Here is a summary for the 9 investing myths, debunked:
- You don’t need to be an expert to start investing, online managers can provide the expertise to do this for you.
- You can start investing with as little as £1.
- There will always be “what if” scenarios of what the future might bring for the economy. If you have a long-term mindset, history shows us that the market will always recover if you stay invested.
- If you’d withdrawn your money during a major event like Brexit, you would have most likely lost money. If you keep your money in for the long term, chances of losing it all are much lower.
- If it sounds too good to be true, it probably is. Don’t count on any “get rich quick” schemes.
- You may not need an IFA. Online managers can provide the same service for lower fees and lower investing minimums.
- Big-name hedge funds do not always mean bigger gains. Most hedge funds underperform the market as a whole, and thus investing in index funds is often a much better investment.
- Be sure you are aware of the fees charged by your advisor or brokerage to make sure you aren’t getting ripped off. Online managers can charge little to nothing for their services.
- Taxes may be a concern, but some loopholes can save you on your tax bill. However, never investing in the first place still results in lower returns with or without major tax bills.
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We are ikigai and our mission is to help you reach your personal financial harmony.
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With investing your capital is at risk. ikigai is not a bank.
The value of your portfolio with ikigai can go down as well as up and you may get back less than you invested. Returns are not guaranteed and any historical returns, expected returns , or probability projections referenced on our website may not reflect actual future performances. You should seek financial advice if you are unsure about investing.
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This article is not advice. ikigai is a trading name of Ikigai Invest Services Limited, a company registered in England and Wales (Company number: 12011662). Ikigai Invest Services Limited is registered with the Financial Conduct Authority (FCA) as an EMD Agent (reference number: 902740) of PayrNet Limited, an Electronic Money Institution authorised by the FCA (reference number: 900594) and is an appointed representative of WealthKernel (reference number: 723719) which is authorised and regulated by the FCA. ikigai is not a bank. Registered address: 16 Great Chapel Street, London, England, W1F 8FL.
