You might think that now is not the right time to invest because you really don’t have a lot of money. However, that’s a common misconception that could jeopardize your financial future.
The best time to invest is when you’re young, because your money will have more time to grow. An early strategy of consistent investment will give you a nest egg later on in life that you can use for major purchases or, better yet, retirement.
Here are some common misconceptions that millennials have about investing.
“The Stock Market Is Too Risky”
You might think that the stock market is just too risky. You were around when the financial markets took a nosedive in 2008 and perhaps even noticed how it affected your own family. You’ve read about the great stock market crash of 1929 and you’re certain that you don’t want to park your money in stocks with an uncertain future.
While there’s no doubt that the stock market crashed decades ago and experienced a bit of a mini-crash in 2008, it’s also proven to be one of the most valuable means of building wealth since its inception. Even if you started investing in stocks in 2005, just a few years before the recession hit, you would still have a return of 72 percent over 10 years. Over the lifespan of its existence – since 1950 – the S&P 500 has enjoyed a return of more than 12,000 percent.
So while there certainly will be hiccups along the way, the historical trend favors those who invest in stocks.
“OK, I’ll Find the Best Company and Buy Its Stock”
You might be holding back on investing because you want to find a great company with a business model you can fully support.
While there’s certainly nothing wrong with investing in a great company, the last thing you want to do is to park all of your money in that one company. If it goes belly-up, then you could lose your entire investment.
Instead, opt for diversification. Spread your money among various stocks, bonds and mutual funds.
“If you want to manage portfolio volatility” says Tom Biwer, an investment manager at Wells Fargo, “then following that old cliché about not having all your eggs in a single basket is a good idea.”
“I’ll Just Buy Into Companies That Other People Are Buying”
A go with the flow mindset might work when you’re on a road trip and trying to decide your driving speed. However, that’s not always the best way to invest your money.
If you think you should invest in XYZ Corp. because everybody else thinks it’s great and is investing in it, then you might be buying a stock that is considered overbought. In a nutshell, that means the stock price could come collapsing down at any time. You might end up taking a steep loss.
“My Uncle Gave Me a Great Stock Tip; I’ll Buy Into That Company”
As stock market guru Jim Cramer says: “Tips are for waiters.”
Somebody might be telling you what you think is a hot tip about a company that’s about to be acquired or report stellar earnings. However, if the person giving you this information really knows that and tells you about it, then he or she is committing a crime. It’s called insider trading and it can get you into a lot of trouble with the Securities and Exchange Commission.
The best advice is to do your own research with publicly available information and purchase stocks accordingly.
“I’m Just Going to Put Cash in a Lockbox and Save That Way”
The problem with stuffing cash in the proverbial mattress is that your money won’t grow. However, what will grow is the cost of products and services that you buy. That’s called inflation.
So if you put cash away in a lockbox, you’re in reality losing money because, thanks to inflation, that money loses its purchasing power over time.
“My Car Is Considered an Asset; It’s An Investment”
While a car purchase may be the biggest purchase you commit to besides your home, the large price tag doesn’t make it an investment. An investment is supposed to make you money. A home is more likely to appreciate over time, while a car depreciates over time. Buying a luxury car for resale value doesn’t make sense because only 1/10 of the top cars for resale value are over the “luxury threshold” of $35,000.
It’s important to acknowledge that car purchases are not investments. So remember to research all your options carefully to see how well your vehicle model and make resell, because you’ll never be able to recoup your initial cost of buying the car in the first place. It’s much better to buy a cheaper car and put your money towards better investments.
“I’m Living Paycheck to Paycheck; I Don’t Have Money to Invest”
This might seem like a valid excuse, but the reality is that you should opt for some lifestyle changes so you can put some money away into a mutual fund.
As noted above, time is your friend when it comes to investing in the stock market. As Marcia Brixey has pointed out, if you start investing $10 per week at 8 percent beginning at age 30, you’ll have just over $99,000 by age 65. However, if you had started 10 years earlier with that same investment strategy, you would have earned more than $228,000 – a difference of more than $129,000.
Once you learn the facts and become more comfortable with investing, you can watch your money grow. Won’t that be a great feeling?