7 investing myths and how to bust them
As a financial advisor, you probably hear a lot of beliefs about investing that don’t exactly ring true. It’s not surprising - the topic of investing attracts a lot of interest, but many of the voices out there are not experts. Here are 7 of the most common myths and some simple ways to respond.
Myth #1: You need a lot of money to invest
The truth is, you can accumulate half a million dollars by age 65 if you start saving $150 per month at age 25 and earn an 8% return. Almost any investment amount you can start with will increase in value if it remains invested and is given time to grow.
If you don’t have extra money to invest, the time-tested rule is to pay yourself first. In other words, flip your budget around so that the first “bill” you pay is to your own investment account. All your other living expenses come after that one. If you can establish this discipline, you will be on your way to creating long-term wealth.
Myth #2: You should pay off debt first
It’s more nuanced than that. Some debt is very expensive - like credit cards that charge double-digit interest rates. It might make sense to pay these off before you start to invest.
But other debt is not as expensive - like mortgages or home equity lines of credit. With these debts, the interest rate might be less than the long-term rate of return you can earn from your investments. If that’s the case, you might be further ahead by investing rather than paying down debt.
Bottom line: look at your debts and investments on a case-by-case basis before deciding what to prioritize.
Myth #3: Investing is too risky
If you have a high-quality investment portfolio, the main risk is that there will be periods of time when the market goes down and your investments lose value. This may be unpleasant, but generations of history have shown that the market always rebounds. There has virtually never been a 10-year stretch when stocks failed to make money.
If you decide not to invest, the main risk is that your wealth will not grow and you will not be able to achieve major life goals such as home ownership or retirement. For most people, the risk of not investing and falling behind is much greater than the risk of investing.
Myth #4: Timing is the key to success
What matters is time in the market, not timing the market. In other words, trying to time the direction of the market is very difficult - nobody can do it consistently. But investing your money and staying invested over time is a sure-fire way to grow your wealth. History shows that the “ups” far outweigh the “downs” in the long run.
A major reason is the power of compounding. Over time, you make returns on top of your returns. Essentially, your money makes more money. And as this effect builds like a snowball, the value of your portfolio can really accelerate. But only if you give it time.
Myth #5: You are too young or too old
You are never too young to invest. Someone who starts saving $500 per month at age 30 and earns an 8% return can retire with over $1 million. Someone who saves the exact same amount but starts 10 years later ends up with less than half that amount. The sooner you start, the better.
If you are behind schedule, it’s still better late than never. And, if you feel that investing is too risky because of your age, consider this: most of us should be planning to have our savings last until age 90 - even longer if you want to leave an inheritance for kids or grandkids. There’s still a lot of time for your money to grow.
Myth #6: RRSP is better than TFSA (or vice versa)
An RRSP is a great way to pay less tax today when you are working and in a higher tax bracket, and take the money out later, when you are retired and in a lower tax bracket. This is long-term money that you should plan to invest and leave untouched until the right time.
A TFSA is a great way to invest money you’ve already paid tax on so that it can grow and earn tax-free investment returns. It’s more flexible. You can deposit or withdraw at any time, which means you can use it for shorter-term goals as well as your retirement strategy.
Neither is better - they are simply designed for different purposes. The key is to understand when to use each account.
Myth #7: RESPs are too restrictive
It’s hard to beat an RESP account for education savings: You get to earn investment gains with no tax, collect up to $7,200 in free government grants, and when the money is finally withdrawn to pay for a child’s post-secondary education, it’s taxed in their hands, which means there’s often no tax to pay.
Some argue that having to use the money for school expenses is too restrictive - what if the child doesn’t go to college or university? If that happens, you have options, like allocating the funds to another child or transferring the funds to your RRSP.
When you weigh the costs and benefits, an RESP almost always makes sense.
Investing myths arise in many ways, whether it’s mistaken advice from a well-meaning friend or emotional reactions to dramatic headlines. Stepping up to confront these myths is one of the many ways that you can help your clients confidently invest with Beneva and build a life of financial security.