Few people in the world TRULY understand investing. This means that there are a lot of misconceptions about it that have been perpetuated for a long time and cause a distance between investing expectations and reality.
The financial industry is incentivized, if you think about, to keep the average person feeling insecure and confused about how to invest.
After all, they get to keep a percentage of your money if you use them to help you manage your portfolio.
I was lucky enough for someone to teach me — really teach me — how investing works and how to be successful with it. It was sort of like Dorthy pulling back the curtain in OZ and realizing there’s just a man back there making things up as he goes.
Investing is something anyone can learn, and it’s something I love to share with people.
There are a lot of expectations people have about investing that just aren’t a reality if you’re not doing it the right way.
To help clear up some of the confusion, here are five common misguided expectations about investing and how they compare to reality.
Expectation: Investing Will Make You Rich Overnight
Reality: Investing can make you INCREDIBLY wealthy, but it probably won’t happen overnight.
Compounding interest takes time to build up, and stocks rarely skyrocket in value over the short-term.
While stories of people who invested in a goldmine of a company and became millionaires in a matter of months are alluring, they only make for great stories because they are so rare.
Instead of trying to earn a fortune through investing in a matter of weeks, months, or even a couple of years, it is essential to adopt a more long-term, forward-thinking approach.
Effective investing may not make you a millionaire overnight, but it can make you a millionaire by retirement — and how great would it be to live truly free, enjoying your time however you want?
Expectation: When You Purchase a Stock on Sale it Will Only Go Up
Reality: This doesn’t happen with every company. The company MUST be wonderful.
Finding a company that is on sale relative to its true value is the ultimate prize of investing. It’s also the investing strategy that Warren Buffett and countless other investors have used to make a fortune.
However, purchasing a company that is on sale does not guarantee that the company will only go up in price from that point forward.
After all, the company dropped to a price below its value at least once already or it wouldn’t have been on sale in the first place.
Companies that are purchased at a discount may continue to drop for a period of time. They may go up a little and then drop, or they may indeed only go up.
The reality is that short-term fluctuations in price are both common and unpredictable.
Over the long-run, however, a good company that is purchased on sale will almost always reach its true value – it just may take a roller coaster ride to get there.
Expectation: Investing Means You Won’t Have to Work Anymore
Reality: Investing will allow you to have a comfortable, happy retirement.
This expectation goes hand-in-hand with the expectation that investing will make you rich overnight.
In the same way that investing isn’t likely to make you a millionaire in a matter of days, it also isn’t likely to earn you enough money to retire in a matter of days either.
Again, with the right approach, investing can indeed enable you to retire younger and wealthier than your 9-to-5 job would have — but you don’t want to quit your job the day you start investing.
Expectation: The Market is Guaranteed to Go Up, So You Should Purchase Indexes
Reality: Index investing leaves you open to a stock market crash and periods of no gains.
Over the course of its entire history, the US stock market has grown at a rate of about 7% per year.
This means that if you spread your money across the entire market by purchasing indexes and keep it there for a lifetime, you can indeed reasonably expect an average return rate of about 7%.
However, “average” is the keyword here, as there are sure to be years where you lose money rather than gaining money – and sometimes you lose a lot.
Another important point to note is that the rate of inflation is about 3% per year, so when all is said and done, if the market went up 7%, you’re likely only seeing about 4% in returns.
Keeping an eye on the market and purchasing individual companies that are on sale and built to survive these crashes is a far safer strategy, especially for those who are nearing retirement and cannot afford to weather out the bear market years.
Expectation #5: Investing is Like Gambling
Reality: There are plenty of ways to lower your risk when investing.
Many methods of investing, that far too many investors rely on, are no doubt tantamount to gambling.
If you select a stock at random with no research and no real decision-making process, you are gambling.
The stock may go up, and it may go down. In the end, it’s no different than spinning a roulette wheel.
However, not all methods of investing are like this, and the world’s most successful investors are certainly not gambling their money away.
Rather, they are investing their money in carefully chosen companies that have a very high probability of delivering sizable returns over the long-run.
It’s true that there is no “sure thing” in the stock market, but there are investing strategies that can greatly lower your risk and increase your chances for high returns – at which point investing could barely be considered a gamble at all.
Did I burst your investing bubble with some of these expectations? What do you expect out of investing?
If you want to learn how to invest like the best investors in the world, get this free guide that will teach you how.
Phil Town is an investment advisor, hedge fund manager, 3x NY Times Best-Selling Author, ex-Grand Canyon river guide, and former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo, and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence.