Most of us didn’t learn much about personal finance growing up, and one of the many abysmal side effects of that is believing in money “facts” that it turns out are straight up myths. These myths don’t just make you sound foolish at dinner parties; they can render serious harm on your finances and hold you back from wealth-building opportunities.
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Let’s consider five money myths that financial experts see running rampant in our society — and get some insight as to why they’re nonsense.
These days, you can start investing with as little as $1 without even moving from your couch, yet people still fall for the old and tired myth that you need a lot of money to be able to invest.
“This myth keeps so many people from investing, which can lead to years of missed opportunity,” said Victor Wang, CEO at Stockpile. “They either think they don’t make enough money, that investing is only for millionaires or even that they can’t start until they get another raise or promotion. But investing is a good idea at any income, and the most important thing is to just get started.”
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The precise origins of the phrase “cash is king” are unknown, but the phrase started picking up steam after the stock market crash of 1987, when it was said by Pehr G. Gyllenhammar, then CEO of Volvo. You should always have some cash readily available in a bank account to cover routine expenses, and more cash set aside in a high-yield savings account for emergencies, but it’s a costly mistake to keep more cash than that.
“Over the long run, holding significant amounts of cash ensures that one will suffer significant opportunity losses,” said Robert R. Johnson, PhD, CFA, CAIA, professor of finance at Heider College of Business, Creighton University and chairman and CEO at Economic Index Associates, who recommended investing in a diversified portfolio of common stocks to build wealth. “Someone with a long time horizon should not have exposure to money market instruments, yet many investors do because they fear the volatility of the stock market. Time is the key to successfully building wealth because of the effect of compound interest.”
We’ve all heard from economist after economist that we cannot time the market, and yet some of us still buy into the myth that we, being oh-so special and smart, can time the market.
“None other than Vanguard founder Jack Bogle is quoted as saying on market timing, ‘After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know of anybody who knows anybody who has done it successfully and consistently,” Johnson said.
Exiting the stock market in preparation for a recession is another way of buying into the myth that you can time the market. “The opportunity cost of such a strategy can be quite high. The 24/7 financial news networks encourage trading. And, trading can be hazardous to your wealth,” Johnson said.
When you’re setting out to invest in companies, you may be drawn to those that produce products you appreciate and use. But to be seduced into investing in a company solely because you like its products is to fall for a dangerous myth: That the maker of a great product is a viable company.
“Investors often confuse a good product with a good investment opportunity,” Johnson said. “The iconic fund manager Peter Lynch, who led the behemoth Fidelity Magellan fund, popularized the notion of investing in companies that you know. In his classic bestselling book, “One Up on Wall Street,” Lynch emphasized that individuals are often able to spot trends in their local community before that information gets the attention of investment analysts.
“For instance, one might identify that a new restaurant chain is becoming popular or that a new product is being praised by friends and family,” Johnson continued. “Unfortunately, many people stop there, believing that all they have to do to succeed in investing is to identify great products and services. They forget that Lynch also emphasized that those companies must have a sustainable business model and be attractively priced. Companies that make iconic products can fail and go bankrupt.”
It’s understandable that you may liken the stock market to a casino because it’s so mercurial and because you can’t time it; but the stock market is actually (and fortunately, for us) not like a casino. Not even close.
“Unlike a casino, the stock market is a positive sum game,” Johnson said. “It is set up for people to win. They simply need time and to exercise patience and discipline.”
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This article originally appeared on GOBankingRates.com: 5 Money Myths That Could Derail Your Finances in 2025
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