Investing can seem complicated enough, but there’s a whole load of investment myths that get in the way too. Some might even seem instinctively plausible, but are still false, and they put off many a newcomer.
I’ve already offered instalment one and instalment two of my myth debunking, and today here’s my selection (for now, at least).
Timing is critical
If you want to make money from shares, you’ve got to watch the charts daily and hit just the right time to buy and the right time to sell, right? Well, no. That might be the way the high-flying world of stock market traders is portrayed in the movie and TV world, but sensible investing is way more dull than that.
If you look back at a price chart for any top FTSE 100 company, the chances are that it’s higher now than it was five years ago, even higher than 10 years ago, and storming ahead over 20 years. And it makes almost no difference what time, what day, what month you choose as your start point.
Warren Buffett, perhaps the world’s best known investing expert, says that it’s time in the market that counts, not timing the market. He doesn’t care about timing, he just buys good stocks at good prices and holds on to them. And he’s made billions doing it that way.
Got to follow charts
So, you’ve heard you need to follow stock market charts, and if you do it carefully then you can get ahead and predict where shares are going to go next? A surprising number of people believe that, and even base their whole investing strategy on charting (or “technical analysis” as it’s often known).
But you know what? A share price charts only tells you about the past, and can tell you nothing about a company’s future. I think we can perhaps learn something about human behaviour from chart trends, with my favourite example being the very similar boom and bust trajectories that people often push popular growth stocks along.
But it really doesn’t help you pick winners, and most short-term chart movements are really nothing more than random noise. I find it interesting to compare share price charts, but for picking good investments it’s a company’s business fundamentals that count.
Your win is someone’s loss
A common view is that the stock market is like gambling. You have to beat the other punters in making the best picks, and at the end of the day, money changes hands between investors, and your win will be someone else’s loss.
Well, while short-term traders might treat it like that, they’re rarely the winners in the long run. The big difference is that gambling (on the horses, the cards, the dice…) is a zero-sum game, and there’s no source of winnings apart from other players’ losses.
Investing in shares is not like that, because companies generate new wealth all the time, and if everyone invests sensibly then everyone can win.
Suppose everyone bought shares in a FTSE 100 tracker, spreading their cash across the UK’s 100 biggest listed companies. Right now, that’s forecast to provide annual dividends of around 4.8%, and everyone could pocket their dividends every year and make a long-term profit with nobody losing.
