Investing has always been an integral part of society. Just ask the ancient Mesopotamians from 1700 BCE, who even registered special laws to facilitate investing into their version of primary assets- land and (live)stock. However, in today’s fast-paced world, misinformation and paranoia have created a lot of anxiety and fear about investing. Whether it is the fear of bubbles in the cryptocurrency market or the apprehension that investing requires large sums of money, there are many investment fallacies and hacks out there that may misinform investors.
While there are many get-rich-quick theories circulating out there that might sound amazing, in reality, most of them are irrelevant and misleading.
Let’s debunk some common investing myths or fallacies and separate fact from fiction.
“I don’t have money to invest!“
This is a common phrase we hear all the many times from our friends, clients, and even colleagues. People erroneously assume that one needs a lot of money to start investing, but this thought is grossly incorrect. In the past, due to limited accessibility and high entry barriers, there may have been some limitations in terms of accessing the stock market or information related to it. However, today with the advent of technology and mobile devices, anyone can start investing with as little as Rs.100. In fact, with a touch of a button, you can purchase any stock or crypto, sitting anywhere in the world. At the end of the day, investing is all about growing your money, and one thing that is certain is that investing is a long-term game. However small the size of your investment, be wise with your money and start investing early, because the earlier you start to invest, the richer you get.
The 100 minus age is a common thumb rule used by many investors to decide their Equity to Debt allocation. Using this rule, one has to subtract their age from 100 to arrive at the ideal equity allocation for their investments. So, for example, if you are 45, your equity allocation will be 55% (100-45 age) of your total portfolio, whereas if you are 30, your equity allocation will be 70% (100-30 age). Simply put, this rule reduces the equity allocation as one becomes older.
Although this thumb rule is well-intentioned, it is only - a thumb rule. Such a broad generalisation that uses only age to decide an investor's asset allocation is not ideal. Every person is unique, and every person’s requirements are different. When planning your investment strategy, you must always take a holistic approach. Risk appetite, financial goals, return requirements, and timelines are essential parts of asset allocation planning. Age cannot be the sole factor in deciding your equity to debt allocation.
Waiting for the price of the stock to fall before you invest? Think again!
Investors, especially early investors, often have this belief that buying low and selling high is the most effective way to invest. While this theory sounds laughably obvious, it must be remembered that investing isn't so straightforward. One must be cautious about two aspects when considering this theory. Firstly, no one knows for sure how well the market will perform over a period of time. If we did, the 2001 Dotcom Bubble and the 2008 housing bubble, both events that devastated the stock market, would have been predicted. So trying to determine if the stock price is at its lowest or high in a bid to buy it at the perfect time can only work if the investor has extensive knowledge about the stock, and even then, it is extremely rare to time it to perfection.
Secondly, compare two investors, one who invests in companies with strong fundamentals and the other who constantly looks to ‘buy low sell high’. History and data suggests that on average, the latter would not necessarily do better than the former. This is because the maximum realisation of returns occurs when investments are made over the long term, and even if someone does manage to time the market perfectly, any excess returns that are generated will only be small.
The Monday effect- Monday is commonly considered the best day to buy stocks as the common perception is that the stock market does poorly at the start of the week, presumably reacting to bad news over the weekend. However, there isn’t a lot of evidence to back this hack. Also, imagine what would happen if everyone wanted to only buy stocks on a Monday - there would be no trading at all! Similarly, Fridays are considered to be the best days to sell stocks as the markets tend to do better on those days. This could be attributed to general positive sentiments regarding the weekend or anticipation of the Monday effect when the markets are assumed to dip. But again, just going back to basic economics, if there was only a supply of stocks on Fridays with no one to buy them, no trading would occur. So ‘best days of the week to invest’ is a flawed concept at best.
Investing is speculating
Is it true that playing poker and investing in the equity market are similar? If the investment is short-term and the objective is to capitalise on volatile stocks or penny stocks then perhaps. However, not all investments are based on speculation. Long-term investing by identifying good stocks with strong fundamentals will provide excellent returns. Investing is therefore not the same as speculation or gambling. While it is true that there are speculators and traders who leverage the volatilities of various stocks and assets, investing to grow personal wealth is usually a completely different game. So the next time someone observes this fallacy, you know better enough to explain the benefits of investing in a good quality stock!
For decades, investors have used the good old 60/40 rule to plan their financial future. Using this thumb rule, investors put 60% of their money in stocks and the rest 40% in bonds. This formula, which was once widely used, is supposed to produce relatively stable long-term growth, with bonds balancing the risk of stocks. But, just like the 100 minus age rule, the 60/40 thumb rule is quite outdated. The investing landscape has completely changed over the last 20 years, and the 60/40 rule is no longer relevant as it fails to offer true diversification of the portfolio. The main reason for this is that bond yields today are minuscule compared to the yields in the past. For example, over the last 10 years, bond yields have been hovering at around 6-7% while returns from stocks with good fundamentals have outperformed bonds with returns of around 9-10%. As a result, such a broad generalisation of portfolio planning is no longer relevant. A healthy mix of equity and debt instruments that are aligned to individualistic goals and aspirations is the need of the hour.
While these are just a few hacks that do not represent the reality of investing, there is no shortage of such misleading theories. At dezerv. we firmly believe that there is no ‘hack or trick’ that secretly breaks the code to successful investing. Growing your hard-earned money requires knowledge, planning, constant reassessment, and most of all patience. The key is not to be misled by these get-rich-quick hacks by educating ourselves.
Author: Team dezerv.
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