There's a common misperception that in order to start investing, you need a large initial sum and lots of time. Here's why that's a myth.
Investing can seem like a daunting task, particularly for those who think they lack the time and resources to start.
When Vanguard last year surveyed Australians on their attitudes and approaches to investing, 50 per cent of participants cited insufficient funds as their top barrier to entry. Unpacking that further, seven-in-10 Australians believed they needed more than $1,000 to start investing, while 35 per cent believed they needed more than $10,000.
These common misconceptions are important to dispel because they're holding many Australians back from investing in their future. While investing may have once been the domain of professionals or wealthy individuals, the introduction of indexing and ETFs, as well as advancements in technology, has meant investing is now more accessible than ever.
Myth: You need a large initial sum to make investing worthwhile
Gone are the days where investors are required to have a large sum to be able to start investing. Vanguard for example has investment options that require only $500 to begin with, as well as low brokerage and management fees.
While it's essential to keep an eye on costs so they don't eat away at your returns, investing a large sum to begin with does not necessarily make investing more worthwhile. The key to building wealth is instead consistent, regular investing of any sum. It not only makes investing less daunting, but it also means investors can harness the power of dollar-cost averaging, which lowers the average cost of investing over time. Remember also that the earlier you start, the more time your investments (no matter how big or small) have to compound – a powerful multiplier.
There's also a range of managed fund options that require no brokerage or trading fees, which means you can invest small sums more often without excessive costs.
Myth: You must spend a lot of time researching and picking “winners”
Investing your hard-earned money shouldn't be compared to an activity like gambling. The truth is, investing the right way should actually be a little less flashy. Once you've put your investment strategy into place, there shouldn't be a lot of day-to-day activity. You should just need to check in periodically and make any adjustments needed to keep your plan on track.
Time spent researching stocks, making frequent trades, and trying to time the market rarely has the return on investment some might expect. In fact, the odds are against you when it comes to market-timing. Author Dr. H. Nejat Seyhun determined that an investor's odds of perfectly timing the market just 50% of the time were 0.5 raised to the 816th power. In other words, virtually zero.
While timing the market doesn't produce returns, time in the market is essential.
Myth: You must always keep up with market news
Market events, like a company announcing earnings or paying dividends, have little to no effect on long-term investment goals, so they shouldn't affect your investment strategy. Your investment selection and portfolio strategy should be made based on your life, risk tolerance and investment goals, not on what's happening in the markets day to day.
Familiarising yourself with some investing basics can help put market events into perspective and may make you feel more comfortable as an investor. Keep in mind that there can be a lot of market commentary and not acting on all market news doesn't mean your returns will suffer. Instead of trying to adapt to what's happening in the market at any given time, ask yourself, “What mix of investments am I comfortable having, given the time I have to reach my goal?”