Unfortunately, when it comes to investing, the gap between expectation and reality is usually wide. This translates to poor investment choices.
Here are some typical misunderstandings and how to avoid them.
Isn’t it true that investing, like winning the lottery, may make you a millionaire overnight?
No, not quite.
Okay, so investing is a guaranteed way to make a lot of money, right?
It can’t be done automatically, but it can be done correctly.
As you can see, there are numerous misunderstandings regarding investing. The truth is that most individuals know about investing about as much as they do about Wall Street, which is to say, almost nothing. Unless you stay in New York, the majority of people only come into contact with investors through the news and Hollywood.
As a result, we believe it’s past time to clear a few common misunderstandings regarding investing. The truth is that when it comes to investing, the gap between expectations and reality is wide, but if you can cross it, you’ll have a much better chance of success. Here are a few typical investing misunderstandings, why they’re wrong, and how you can handle investing properly.
Expectation: Investing Will Instantly Make You Rich
You’ve seen pictures of crazy-rich investors making it big on Wall Street, right? Those pictures that make you believe you may become rich as soon as you begin investing?
It’s time to let go of those things.
Investing can help you build money. This is not the same as becoming rich, and it isn’t something that happens overnight. It happens as a result of a concept called compound interest.
Let’s say you put $100 into it. Let’s imagine it earns 5% each year in interest. If you don’t touch that $100 by the end of the year, it will have increased to $105. It will rise to $110.25 at the end of the second year. That’s because you’re now earning interest on both the original $100 and the interest you earned.
In other words, as you invest over time, you get gains in your interest. This builds up over time, but keep in mind that it takes years.
Expectation: The Market is Guaranteed to Go Up
What are the links between these dates? October 1929 and December of 2007.
They’re the agreed-upon start dates for the Great Depression and World War II.
The two most important examples in human history show the market does not always move up and, in fact, falls from time to time. It can even crash tragically at times.
Oh, and even when it stays the same, the average yearly stock market return over the last century has been 10%. Even still, the important word here is average. There will be years when you perform better and years when you perform worse.
In basic terms? The market does not always go up, and you can never tell when it will go up or down. More crucially, you should plan ahead to absorb those ups and downs.
There are 2 methods for doing this.
The first is that you should spread your portfolio, which is smart investment advice for all investors. This protects you from major failures in any one area.
Second, you should mix your portfolio with assets that safeguard you from stock market fluctuations, which includes investing in assets other than stocks. Alternative investments are the best method to do this because they have a weak relationship with the market (and often perform opposite to the market). If the market crashes, these assets can likewise be used as a safety net.
Expectations: Investing is basically gambling
Hollywood has a bad history of showing investing as fast-paced, entertaining, and more of a mind game than a form of art.
Investing isn’t the same as playing blackjack. It’s also not a game of chance.
Gambling is all about taking huge chances. While some parts of investing are riskier than others, it is easy to reduce your risk level when investing—in fact, a well-balanced portfolio should have a mix of risky and low-risk investments to be successful.
The problem is that the stock market is similar to a game of chance. It is possible that it will rise or will decrease. It may or may not work out well for you. You can’t do anything about it because you don’t have any control over it.
The world’s top investors, on the other hand, aren’t professional gamblers. They’re long-term investors who invest in companies and assets with a strong possibility of large returns. And, irrespective of how much you invest, you must be steady if you want to see positive results.
Otherwise, you’re just gambling, and your chances of winning are roughly the same as playing roulette in Vegas.
Let’s Invest Smartly
Here’s the thing: if there’s a huge gap between your expectations and reality when it comes to investing, you can close it by taking the time to educate yourself. That includes doing your homework, learning from the proper teachers, and getting started with the correct tools.
One of the most common reasons for investors’ failure is that their expectations do not match reality.
This isn’t just a problem in the investment sector; we often fall victim to the Expectation vs Reality Trap in everyday life.
The most serious issue in life is the mental image we have of how certain things should be. We make assumptions about how particular objects or activities should be, and when we don’t see or experience them, we become angry and leave the scene. We don’t even attempt to figure out what went wrong or how to fix it.
When we first begin investing in stocks or mutual funds, we set a target return based on previous performance. Despite the fact that that particular investment will be on track, the road ahead will be rough. For example, we might expect our investments to generate 12% annualized returns before investing, but in reality, we may accomplish our goal returns, but it will not be a smooth ride.
So, if we don’t achieve the expected returns in the first few years, we shouldn’t abandon the plan; instead, we should assess if we’re on the right track and continue investing.