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Five stock market myths keeping you from building wealth

Mar 19, 2024

Wendy Myers, Head of Securities at PSG Wealth, looks at some myths that are prevalent among South Africans when it comes to the idea of investing in the stock market.

Five myths about investing in the stock marketWhen it comes to the world of investing, many people have no idea where to start, how to invest, and what the risks are. There are also several myths surrounding investing in the stock market that need to be debunked to help you make informed decisions that will stand you in good stead in the long run.

Myth #1: Investing in the stock market is like gambling

Investing in shares is nothing like gambling. To understand why, we need to consider what investing in shares means.

The concept of ‘buying a share’ may be better understood if we phrase it as ‘buying a share – a portion – of a company’. When an investor buys a share, it represents fractional ownership of an actual company. This entitles the shareholder to a claim on the assets of that company as well as a fraction of the profits that the company generates, in the form of dividends.

Those who believe that investing in shares equates to gambling do so because they think of shares simply as a trading vehicle, and don’t recognise that an investment in a share represents ownership in a company.

Investing and generating wealth should not be confused with the zero-sum game of gambling. Gambling merely takes money from many and redistributes it to a few. No value is ever created. With investments, on the other hand, the overall wealth of an economy increases.

This growth is reflected in companies’ share prices which investors benefit from if they hold shares over a long period of time.

Benjamin Graham, the father of value investing, rightly said that a market is a voting machine (gambling) in the short term, but a weighing machine in the long run. And investing is an endeavour for the long run.

Myth #2: You can time the market

Timing the market is the idea that wealth can be created by predicting the right time to buy and sell shares. While this is a sound idea in theory, it is a complete myth in practice because nobody truly knows exactly what the market is going to do and when. Research shows that the cost of waiting for the perfect moment to invest typically exceeds the benefit.

The best strategy is therefore not to try and time the market, but rather to define your investment plan and invest as soon as possible.

If you don’t have the opportunity to invest your funds all at once, or you feel the risk of doing so is too high, you can invest smaller amounts more frequently. This approach offers the benefit of rand-cost averaging, and on a psychological level, it can help prevent procrastination and minimise regret.

Myth #3: You need a lot of money to start investing in the stock market

There is a prevalent perception that investing in the stock market is only for investment banks, asset managers and ultra-high-net-worth clients, but this is certainly not the case.

During the 1990s, the internet opened the market up to retail investors, and retail brokerage houses provided cost-effective market access that made it easier for these investors to invest in the stock market.

The best way to start investing in the stock market is to start contributing monthly amounts to a retirement plan. Your financial adviser can help you open a retirement annuity, which is effectively a personal retirement product. Shares are typically one of the main underlying asset classes making up a retirement annuity.

Myth #4: Buy low, sell high

This myth is linked to the idea of timing the market and is one of the most common investment myths among those who are yet to start investing in the stock market.

This inexperienced viewpoint says that you just need to buy when the price is low and wait to sell it when it reaches a higher price. Even experienced investors battle with this however, and even if you find a stock with a low price, deciding when to sell is challenging.

Myth #5: The younger you are, the more risk you can take

Younger investors tend to think about taking high risks to make extraordinary profits. Although younger investors have longer investment time horizons, it’s not advisable to take extremely high risks in pursuit of high profits.

It’s worthwhile to take some advice from legendary investor Warren Buffett, who has two investment rules:

  • Rule No.1: Never lose money.
  • Rule No.2: Never forget about Rule No. 1.

This post was based on a press release issued on behalf of PSG Wealth.

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Maya Fisher-French author of Money Questions Answered

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