12 min read

Investing in stocks: five myths debunked

If you’ve got cash savings, the chances are they’re not earning you much in the way of interest right now. The UK base rate of interest is just 0.5%, and inflation is running at 3%. This means that, in real terms, your pot of money is shrinking because its rate of growth is not keeping pace with the rising cost of goods.

Two people looking at graphs and figures taking notes

If this is the case for you, it might be time to think about investing some of that money to make it work harder. Investing in world stock markets could have earned you more than 7% a year on average over the last three decades if you reinvested the profits. Investing doesn’t come without risk however, as the value of stocks and shares rises and falls, so it’s possible for investors to get back less than they put in.

There are a few commonly held beliefs that can put people off dipping a toe into financial markets, however. Here are five of these myths, and why you should take them with a pinch of salt.

1. You need to be rich to invest in stocks

A lot of people think investing is only for the wealthy, but actually investing is more accessible now than it has ever been. Several robo-advice services and automated online platforms such as Wealthify and Wealthsimple let you open an account with no minimum investment, so even if you’ve only got a spare £1, you can still get started.

These types of services typically invest your money in investment products which track the performance of particular stock markets, but the choice of what you invest in is not limited to shares and will often include other assets like bonds, property and alternatives.

Usually these are online-only services, designed to let you view and manage your portfolio on your smartphone or tablet, and they may have lower fees than actively managed investments (those that are run by a fund manager who picks and chooses stocks they think will go up) so they can be a good starting point for those who are new to investing.

2. You can double your money overnight

Probably not. And if, by some miracle, you did, chances are you’re in a very volatile and high-risk stock which could just as easily move the other way. When you’re investing, one of the golden rules is that you must take a long-term view.

Most professional investors when they buy a stock are thinking about how it will perform over the next three to five years, and many will hold companies even longer than that. Famous investor Warren Buffet once said his favourite holding period for a stock is “forever”.

But you also need to be sensible when it comes to investment returns. Research has shown that investors tend to have unrealistic expectations about the kind of money they can make. A study by Schroders found 58% of UK investors expect to make an average return of 10% a year over the next five years. This is more than double what the investment industry expects to deliver – Schroders’ Economics Group has forecast a 5.4% annual return for UK equities over the next seven years, or 2.4% a year accounting for inflation.

3. You can lose all your money overnight

It’s unlikely that you would lose all your money overnight unless you put everything into a single stock and then something dramatic happened like the company going bust. This is why diversification is so important.

Diversification means holding a balance of investments which are unrelated meaning they don’t all tend to move up and down in line with each other. Doing so spreads your risk – so if one of your stocks loses some value, hopefully your others will still be performing okay.

Again, taking a long view means market falls will seem more like blips in the bigger picture, smoothing out your overall investment returns over time.

4. Investing in stocks is just like gambling

It depends on how you are picking your stocks. If you choose a stock at random because you like the name – like occasional flutterers might do at the horse races – then it may as well be gambling.

But if you, your financial adviser or fund manager do proper research and what the professionals call ‘due diligence’, then you should be making a well-informed and considered decision as to a company’s future prospects versus the cost of its shares. This requires experience and skill – quite different from a roulette player putting it all on 13 black.

You could also look into alternative investments, from art and fashion to classic cars, wine and much more. These more left-field choices come with their own unique risks so again, always do your research and potentially seek the advice of a professional.

5. You need to be an expert to invest in stocks

Research is vital when it comes to investing in stocks, but you don’t need to be the one to do it. You can buy ready-made, well diversified investments built by professionals, and you can choose one appropriate to the level of risk you are comfortable with. This is another important point – gauge the level of risk you’re willing to take, and avoid doing something outside your comfort zone. You need to invest in amounts that are appropriate for your financial background.

A Stocks and Shares ISA is a good stepping stone for novice investors who don’t feel confident selecting their own investments – with some providers offering a stocks and shares Lifetime ISA, for example.

Alternatively, you could buy into a fund and leave the investment decisions up to the fund manager, who will have a wealth of research at his fingertips.

Whatever you choose, don’t be put off from investing altogether because of misconceptions. Growing your money should be an option for everyone. Just always keep in mind the nature of the stock market, it can go up and down, so it’s possible to get back less than you invested.

 

Written by Hannah Smith – Financial Journalist

Note: Whilst we take care to ensure Talking Finance content is accurate at the time of publication, individual circumstances can differ so please don’t rely on it when making financial decisions. The opinions expressed within this blog are those of the author and not necessarily of OneFamily.