Investing is scary. It’s complicated and no one really knows what’s going to happen. This must sound familiar, and it’s what I used to feel for a long time before I started my investment journey. Imagine saving for months and then investing it all at once into ONE specific asset class. Then picture this, 2 days later it loses 10% of its value just like that. This would be a bitter pill to swallow for anyone and I would know because this actually happened to me when I bought my first stock. I still have it to this day.
Before, I decided to invest my money I decided to do a fair bit of research about which option to take and spoke to my parents who, surprise surprise also own individual stocks of different companies. See investing, like every other decision we make usually comes from what we already know and are exposed to in our formative years and includes the biases that we have come to accept as ‘truths’. I bought individual stock because I had seen it being done and somewhat understood the process so it was easy for me. Not all of us have the luxury of being able to consult somebody and that’s where I would like to offer my help.
Investing is scary and it’s even scarier if we hold onto beliefs that won’t help us invest wisely. Before you think about how you want to invest, I’m going to give you a list of the seven most common investment myths (one for each day) that you have probably heard and might believe to this day. I hope it leaves you to reflect on your own views about investing and how they were passed down to you.
- “Investing is only for the rich”– This is the MOST common investing myth you will come across and there’s a fairly obvious reason for that: the media. Most forms of media present the individual investor as someone who is incredibly wealthy and makes a killing of the stock market who probably owns a yacht or an airplane. This investor is also probably a man because we’re made to believe that women only know how to shop and cannot save or invest money which is NOT the case. In Kenya, women are more likely to understand the value of saving and investing, with a prime example being chamas or table banking.That is a discussion for another day though.
Investors come from different backgrounds and are found at different income levels. It is true that to be able to invest in certain assets it will take a lot of money (like real estate) but you can start investing with as little 1,000 shillings or $10 USD. Your options may be a little more limited to options such stocks, bonds (like the M-Akiba bond) and mutual funds but you can still get your foot in the door. You can start by investing small or you can work on saving your money until you decide on an opportunity that you are truly passionate about. I recommend the latter approach if you are unsure about what to invest in.
2. “Financial advisers know best”– This is a view held by many individual investors, especially those who buy individual stocks. The idea people have is that all financial advisers know what is going on with each and every company and are they are able to tell you what investments you should buy, hold and sell. WRONG! A lot of companies that deal with securities in Kenya, that employ “financial advisers” actually just hire salesmen who know a bit about securities. There are essentially there to make sure you have a large turnover so that they can make money off your trades through commissions (which range from 1-3% of the trade’s value).
Now this is not to say that these guys don’t know anything about investments. Often times, they know more about investments than the average person and understand the economy but their advice is no guarantee. As for timing the market, these guys don’t know any more than someone who keeps up with the business news and knows what’s going on with companies (by understanding their accounts and periods of announcing profits and dividends – you can do this too). For example, stock prices CANNOT be timed whatever a person tells you (unless they are insider tradering and that is ILLEGAL) because stock prices fluctuate depending on market sentiment, something that no one can really forecast. If you want to know which type of financial advisers you should stay away from, check it out on this Market watch article.
3. “Big risk also means big reward”– I’m not entirely sure about where this myth originates from and I really don’t want to know. What I will tell you is that yes, ignorance is bliss but not in the investing world. Investing in something solely because it is risky does not mean you will be rewarded for that. In fact, you are more likely to lose the principal amount because of it. An example that I can point to is Bitcoin. I’m a big fan of le coin and I owned a very small amount of it in early 2018 (at around $8,000).
I invested in Bitcoin after reading its whitepaper and doing my research (what also helped was realizing that this was the same coin I was told about when it was at less than $500 a few years ago). I like Bitcoin and I do think it will be a big part of our financial system across the world but just not now. I understood when I was investing speculating that this was a bubble and that I could very well lose all my money. Thankfully, I did not lose any money and instead got a free investment lesson out of it. I say free because often times these lessons are paid for by investment losses.
4. “Life insurance is an investment”– Said every single life insurance salesperson EVER. Now I am not saying don’t buy life insurance. You should buy life insurance but PLEASE don’t buy whole life insurance because you’re basically making your salesperson a tonne of money and saving money in fund that will most likely not even beat inflation. I am not an expert when it comes to insurance but I know someone whose opinion matters to me (and a lot of people interested in personal finance) and that is Dave Ramsey. Dave Ramsey is someone that I follow very closely and I suggest you look him up and start implementing his principles for wealth creation. He is a simple man with even simpler advice and when it comes to life insurance, well, why don’t you just read this article he wrote to understand the difference.
5. “Investment fees are small and insignificant.”– Small amounts of money add up. It’s why people save a portion of their incomes and don’t wait to win the lottery. The same concept works against you if you choose to waste money paying for investments with exorbitant management fees (often seen with mutual funds). You should pick an investment option that allows you to minimize on investment fees so that you can buy more of that investment and spend less on the fees. Some times you will pay a higher percentage for commission if you are purchasing stocks below the value of Ksh. 100,000. I understand that you might not be able to buy stocks of that value every time. What I would suggest is understanding the fees associated with your investment before doing anything.You may try to negotiate with your broker or swap to another broker or you can save money and then buy a larger quantity.
6. “Past performance guarantees future success” –Benjamin Franklin once said that “in this world nothing can be said to be certain, except death and taxes” and boy did he hit the nail on the head. No one can tell what you what the price of an investment will be. They may be able to say if it appreciates or not depending on their understanding of the economy, and other theoretical principles but nothing is certain. The world of investing is dynamic and market sentiments change and the laws of countries change (like our interest rate cap – what is the deal with that, seriously?) . What the price was for an asset at one point in time does not mean that it will be that way again. Markets are cyclical and they go up and down but basing the future value of any investment on past performance is worse than buying whole life insurance (I’m sorry, I just had to).
7. “Popular opinions make good investment picks”– Unlike swimming in the ocean, in investing you don’t want to ALWAYS be swimming with the tide. You make money when you do the opposite of what a majority of the people in the market do. If people are selling off their assets because they’re scared, guess what? You can buy theirs at a great price (if it’s worth it). Who doesn’t love a good bargain?! What you should keep in mind is that you can very well go with popular opinion if you believe in that investment opportunity but don’t be swayed by the masses to put your money where they’re putting it.
As always, I urge my readers to use caution and common sense whenever they are thinking of investing. You’ve worked hard to keep your hard-earned money aside to invest so make sure that your money works just as hard for you.
There are a lot of people out there on the Internet giving all sorts of advice about personal finance (and I’m no different). Some of that advice is excellent and some not so much. It gets difficult to decide if what someone is saying is correct or they’re trying to sell you on something that they are being paid to advertise. If you are interested in listening to some REAL experts I recommend following Dave Ramsey and Phil Town. I listen to these two along with other more controversial choices such as Robert Kiyosaki and Tony Robbins. In addition to them, I also enjoy listening to and reading about personal finance from the people over at the The Financial Diet, The Minority Mindset and Mr. Money Mustache himself. I would recommend them to anyone, go out and check their websites. Their track record and their message is simple AND effective and their advice can be replicated by 99% of you.
I hope you enjoyed the post and if there are any other investing myths you think I missed out or ones you’ve grown up hearing and believing that I did not include, please drop them in the comments section.