Since I started working as a Financial Trainer, I have heard a lot of reasons that push people away from investing their money.
Some of them are absolutely legit, but I noticed 6 myths that keeps on popping up in conversations with potential clients about this topic.
I decided to sum them up in this post, and you can check if there is any of them that is one of your beliefs about investing.
1. "I have no idea what investing is and how to start.
Isn’t it better keeping my money in my savings account?"
The first part is absolutely ok.
If you weren't lucky, your family didn't teach you the basics of money management and investments, and your school probably treated it like a taboo topic.
So, if you lack the basic financial knowledge is very wise not to invest and wait to understand a bit more before throwing away the money you worked so hard for.
Still, the second part is the one where I disagree.
Keeping your money on the saving bank account feels safer than investing, but the expected return is extremely low.
And that means that you will need to work a lot more, or to do more penny pinching if you want to realize your financial goals.
Btw, here is an example of what I mean with extremely low returns: imagine you sign up for a saving account that gives you a 4% return for a 2 months deposit, with no possibility to extend this once it's finished.
This is not exactly what it looks like.
This 4% is actually a clever marketing trick, because it "accidentally" omit 2 pieces of information which are changing the return you get from your investment.
The first thing you need to know is that 4% is an annual return.
That means that the return you will get in 2 months is 4/6= 0,66%.
I bet now it looks a lot less inviting.
And that's not all: this 0,66% is gross, so you need to consider even taxes (19% on your return, in Poland).
That means that your net return rate, for 2 months investment is not 4% but 0,54%.
To put it even more into perspective, let's use a practical example:
You put 1000 Euro in a saving account and 2 months later you get 1005,4 Euro.
To have these 5,4 Euro, you are sacrificing the opportunity of investing 1000 Euro in something which can give you a better return, or spending them on something you truly enjoy.
Are you sure there is not a better way to earn more money while keeping the risks under control?
The answer is yes, but it will require you some extra effort and study.
The good news is that is not a lot, though, and I will do my best to make it simple and jargon-free.
2. I don't have enough money to start investing
Until few years ago, this was a very valid objection.
Invest money using your bank as a platform requires you to pay a lot of fees and expenses.
They were (and still are) so high that it made no-sense starting investing with a bank if you are not willing to put at least 10 000 Euro (or equivalents) to work.
Thankfully today the situation improved a lot thanks to online brokers that have very low fees and make financially convenient to invest even if you have only 50 Euro.
I know it sounds too good to be true, but there are some of them who are regulated and have been in the game for a while.
For example, I have been using for years Degiro and although it has some shortcomings, it is hands down the cheapest provider you can use.
It gives you the chance to invest in low-cost well diversified ETF paying no commissions (as long as they are part of this list).
To get started you need to open an account (free of charge and it literally takes 5 minutes) and then you pay 2.50 Euro/year for every market you decided to operate, and very low commissions for every time you operate on the stock market (for the Polish market, here are more info in Polish).
If you stick to the ETFs commissions-free, you will end up paying 2.50 Euro to have access to the best financial products on the market.
So, today the bar for start investing went down a lot and "I have no money" is just an excuse, unless you really can't save more than 100 Euro a month (and in this case forget about investing and focus hard on how you can boost your income or reduce your spending).
Important: I have no association nor personal interest in promoting Degiro.
The results of my search pointed out at this platform as the most cost effective, but if anybody else knows another platform/service that is interesting, write me an email at firstname.lastname@example.org, and I will be happy to update this post.
3. If I invest, I will end up losing all my money
Well, first of all why should you invest all of your money to begin with?
One of the key rules of investing is to invest only the amount of money you don't need right now.
So, before jumping into investing you should build a "safety pillow", which is an amount of money that can cover somewhere between 6 months (if you are an employee with a stable job) or 12 months (if you are an entrepreneur/freelancer) that will cover your emergencies.
Doing that, you will avoid one of the most common reasons people are losing money on the stock market: being forced to sell some of their investments because an emergency happened.
Now that you are protected against this risk and you have the safety pillow that you need, the next question is: "How to avoid losing the money that I am investing on the stock market?"
The answer to this question is extremely long and detailed.
Basically Simplinvest is born to be the answer to this and it's hard to boil everything down in a single post.
But if I should choose the most important thing when it comes to not lose money, I would say that the key is to diversify properly and have a clear time horizon for your investments.
In plain English, don't bet all of your invested money on a single stock (or a very small group) but choose the most diversified ETFs and keep in mind that stocks are fantastic tools to create wealth in the long run (1o years onwards), but they are much more unpredictable in any time span shorter than that.
So, for any investment below 10 years, be aware that investing in stocks have a chance to give you a capital loss when you will need to get the money back.
And if you are patient, you will be rewarded.
Just to give you an idea, the trend of the U.S. stock market in the last 250 (!) years has been to go up, even counting the dot.com crisis in 2000 and the 2007 crisis.
4. If I invest, I will not have access to the money when I need it
This point can be true, it depends which kind of asset you decide to buy. For some of them you could need to wait 2-3 days (Mutual Funds), for some others you could take your money straight away but paying a penalty for it (Index Linked Insurances for example), but for the most part of the assets where we have more experience investing (stocks, bonds, ETF) you can immediately take your money away from it with no penalty.
Said that, as a rule of thumb is better not to take money away from investing unless it’s strictly necessary (that's why it's so important to have a safety pillow)
5. “All stocks are equally risky, I don’t want to buy any of these”
Stocks are a type of financial product which is usually classified as “high risk” from all the banks.
But…not all the stocks are created equal. Do you think that buying stocks from Coca Cola carry the same risk as buying stock of an obscure company producing wooden squirrels in Thailand?
I bet you answer no, and rightfully so. Coca cola has a proven record, a proven product and operate on the global market, so the chances of it failing are lower than the squirrels company.
Not only that. Sometimes great companies are not great stocks, because everybody knows that they are great, so the price of the stocks skyrocketed.
That's why it's so difficult to understand which stocks are really risky and which are not, but saying that all of them are equal is wrong.
Important: what I did below is an oversimplification. There are many more factors to keep into consideration when you want to invest in a stock, and not always being big or famous is better. I just wanted to underline that every company carry different level of risk, so the stocks (a reflection of the company performance) are doing the same.
6. I don’t need to know more about investing. My friend/son/bank/whoever else knows better and I trust them
Trust is very important, our current economic system will collapse the moment we take it away. So, when it comes to your friends or relatives there could be a chance that they actually know more about you on this topic, and rely on them could be a time saver.
At the same time though, I strongly believe that gaining a better level of understanding on investing will help you out choosing the right advice and the right advisor, making the investing process a lot easier and less painful.
This concept is especially true every time you are dealing with bank clerks or insurance salesmen.
When they propose you a product, remember that they put at the first place their own personal interest (will I earn more commissions/bonuses selling this?), then their institution interest (will sell what my boss told me to sell, or the most expensive option for the client), and if you are lucky maybe after all of this they will take care of your interest, most likely if it is aligned with the first two.
It’s their job, so I have no intention of spreading hate around, but once you are aware of this dynamic you will start negotiating more on what they offer you and you will be more aware of the sub-optimal financial.