4 Myths About Portfolio Building
If you think you need to be a slick Wall Street type to invest, think again. That’s just one of several myths about building an investment portfolio that you may have gleaned from television and movies. Here are four more investment myths that we can debunk right now.
1. You Have To Be Filthy Rich To Invest
These days, if you have an extra $50, you can start investing. You just need to shop around a bit first. Index mutual funds, index exchange-traded funds and automatic investment plans are all easy ways to create a diverse investment portfolio with a small chunk of change. The key word here is “diverse.” You don’t want to invest all your money in a single asset.
As you research potential investment plans or funds, look for a commission-free account or one that doesn’t require you to maintain a minimum balance. This will help you continue to keep costs low.
If that $50 entry fee is too steep, you might try an automated investment program. (Steer clear of penny stocks altogether; they’re ripe with scammers.) My nephew, for example, uses a micro-investing app that rounds up each transaction he makes with his debit card and rolls those nickels and dimes into an investment account. All he has to do is decide how aggressive or conservative he wants his portfolio to be. Robo-advisors do the rest.
2. You’re Gambling Away Your Hard-Earned Money
While it’s true that there is an element of risk involved when it comes to investing, that potential for a bad outcome is microscopic compared to, say, playing blackjack. You do increase your risk of losing money if you pour all of your cash into only one asset, but, as mentioned above, that risk is mitigated by building a diverse portfolio. When your money is spread across a variety of investments, that helps even out any wrinkles in the market.
In truth, there’s always the small risk that the entire market could plummet, but here’s the thing: It always bounces back. Don’t get scared and sell; the market will rise again. In fact, after the market takes a tumble, it’s often the perfect time to scoop up some shares while they’re essentially on sale.
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3. You Have To Pick the Perfect Stock
There is no perfect stock. We all wish we’d invested in Apple 40 years ago, but there’s simply no way to know how a company will fare, so there’s no reason to stress over adding the right stocks to your portfolio.
Don’t forget that there’s more to invest in than stocks, either. While stocks are a good fit for the majority of investors, you can also keep your portfolio diversified by investing in commodities, bonds or real estate. As already noted, index funds and index exchange-traded funds are also solid ways to spread your wealth and remove the pressure to pick the next Amazon or Altria.
4. Gold Is Good
Many people believe they’re somehow “beating the system” by putting their money in gold and precious metals. Those people are wrong.
While gold is a safer investment option, it’s not a very lucrative one in the long run. Your return matches inflation, and that’s about it, which means your return will be small — think 1% or so.
If inflation is your biggest hurdle as an investor, opt for bonds instead. Their average return is more than twice that of gold. And if you just can’t get by without gold, most experts agree that it should occupy no more than 3% of your portfolio.
It’s never too late to start investing. Don’t let the media fool you into thinking stocks are strictly a young man’s game. Instead, do your homework first and build a portfolio you’re comfortable with.