There are countless amounts of personal finance and investing myths and mistakes. Welcome to part one of busting these myths and mistakes.
Myth #1: “I don’t need to save for retirement right now.”
We see this a lot. Whether it is a young investor or someone older who thinks they have done enough. Now, there are a small portion of people who actually don’t need to save for retirement for multiple different reasons. However, the much larger majority of us do. So following this thought can have detrimental effects.
The first of which is giving up the compound interest. For anyone unfamiliar with compound interest please visit this blog of ours that we talk through it. Or, go to any compound interest calculator on the internet and play around with the numbers. You’ll soon see how powerful compound interest is. Ultimately, delaying saving/investing chips away at your ability to take advantage of one of the greatest things about investing.
Delaying or putting off saving can ultimately take you to a place where it is impossible to catch up to where you need to be. This is the worst case scenario and the younger you are, the less of a chance there is for this. But the idea that waiting to save and invest makes it much harder for you to reach your goals. The earlier and more consistent you are with saving and investing for retirement makes it much easier to reach the goals you set for yourself.
Ultimately, saving and investing for retirement as early and as often as possible gives you the ability to get to the goals you want to and live the life in retirement you want to.
Myth #2: “I need a lot of money to invest.”
A common misconception is that you automatically need a lot of money to actually invest, but before then it doesn’t make sense to invest. And that couldn’t be farther from the truth.
To give an idea of what building a foundation in investing looks like, say we are just starting today with investing. We start with $100 and invest that. From here, we add $100 monthly to our investment and average 10% per year in the market.
In year one, that initial investment and contributions grew to $1,364. $1,300 of principal and $64 of interest. This is the ground work. Let’s jump forward to year five. At this point, we have $7,817 invested: principal $6,100 and interest $1,717. Now, year 10. We would have $20,246 invested: $12,100 of principal and $8,146 of interest. Finally, year 20. We would have $72,499: $24,100 of principal and $48,399 of interest.
That’s starting and never changing your strategy for 20 years and you see the growth we are able to achieve and you don’t need a lot to get there. It may require some sacrifice month to month, but if those sacrifices are made, the proof is there that we don’t need a lot of money to invest.
Myth 3: “You can lose all your money.”
While it is true that investing does carry along some risks, this statement is a myth with good investing.
Firstly, it's important to note that not all investments carry the same level of risk. There are strategies you can use to minimize this risk, such as diversification. Investing in just one or two companies with all of your assets carries a significant amount of risk because you never know what will happen with those companies. However, when you invest in baskets of companies like in an ETF or mutual fund, you mitigate this risk as your investment is spread out across numerous companies that all operate differently.
You just need to understand good investing and how to mitigate certain risks. For example, let’s say you invested in 10 different companies. Unfortunately, nine of them go to zero. But, the 10th company you hold on to for decades and it returns 100 times what your initial investment was. Then for your return you have increased your investment tenfold by just getting one out of 10 investments right. You got a 10% on the test and still had an investment 100x your initial investment.
Now, that obviously isn’t ideal and what we are looking to do either, but it is a good example on how if you spread out your investment over numerous companies, your concentrated risk mitigates and you allow yourself some misses so you can have your winners pick up the slack and in the end you don’t lose all your money.