Inflation and interest rates are rising. Stock markets are tanking. Crypto is collapsing.
You have to be a highly skilled and knowledgeable investor to safely navigate this minefield, right? You know, sell this stock over here, buy that stock over there. Maybe add some gold – just in case – and raise some cash to “position your portfolio.” You might even “buy the dip” on bitcoin, because if people were buying it at US$69,000, it must be a steal at US$30,000. Heck, Pierre Poilievre even bought a shawarma with bitcoin, so clearly it’s the future.
I’m being facetious (except about the shawarma, which is true) to make a point: With investing, there are lots of myths masquerading as facts. These myths seem to jump to the fore when markets are suffering one of their occasional conniptions, such as the sharp declines on Canadian and U.S. stock indexes and the crushing losses in tech stocks and crypto that we’ve witnessed recently.
During volatile times like this, it’s important not to let myths sabotage your investing plan. Some of these myths are so pervasive and ingrained in our culture that many people don’t question them. They reflect the way investing is portrayed in the media, from financial websites and business channels to movies and the evening news, where dramatic events – especially ones in which people make or lose a lot of money – get the most attention.
Here are five of the most common investing myths. Become familiar with them so that, to paraphrase Rudyard Kipling, you can keep your head while everyone else is losing theirs.
Myth No. 1: Investing is hard
No, it’s not. Once you figure it out, it’s actually quite easy. What’s hard is tuning out all the noise that makes investing seem so difficult. Whether it’s headlines warning about inflation, politicians touting the benefits of cryptocurrency or commercials promoting some broker’s new trading app with real-time technical analysis tools, the 24/7 firehose of investing information can leave people paralyzed and fearful. Not letting information overload influence your investing decisions is one of the keys to generating wealth.
Myth No. 2: You need to trade to win
Wrong again. Buying strong, reasonably valued companies – or low-cost index exchange-traded funds – and holding them through good times and bad is how you win at investing. As simple as the buy-and-hold strategy sounds, many people find it difficult to practise. One reason is loss aversion. When a stock they own falls in price, they sell to avoid the pain of further losses. When a stock climbs in price, they sell to lock in their gains and avoid a potential pullback. An itchy trading finger not only drives up commissions and taxes, but it often causes investors to miss out on gains when the stock they just sold eventually moves higher. Holding through bull and bear markets, interest-rate cycles, wars and other crises is a far more profitable – and less stressful – strategy.
Myth No. 3: The market is a casino
The market is indeed like a casino – if you’re buying call options on GameStop Inc. (GME) or trying to catch the bottom on bitcoin. But that’s gambling, not investing. If you’re simply using the stock market as a mechanism to acquire part-interests in businesses with rising sales, earnings and dividends – with the goal of participating in the long-term growth of those businesses – that’s investing. Lots of banks, utilities, power producers, real estate investment trusts and strong consumer brands meet these criteria. Sure, there is always some degree of risk when you buy a stock or a fund, but if you focus on well-established companies, stay diversified and have a long investing horizon, you will almost certainly make out very well.
Myth No. 4: The road to riches is paved with great stories
People love great stories – especially when they’re about companies with a new product or technology that is supposedly going to make them rich. The truth is that for every Amazon.com Inc. (AMZN) or Tesla Inc. (TSLA), there are countless story stocks that blow up after liftoff. The past year alone has seen dozens of cases, from fitness company Peloton Interactive Inc. (PTON) to electric vehicle startups such as Nikola Corp. (NKLA) and Lordstown Motors Corp. (RIDE). In Canada, remember when cannabis stocks were going to be the ticket to early retirement? Canopy Growth Corp. (WEED), to take just one example, has tumbled 90 per cent from its record high on Oct. 16, 2018 – the day before recreational cannabis was legalized. Contrast that with the utility Fortis Inc. (FTS), which is engaged in the unglamorous business of distributing gas and electricity. Fortis shares have posted a total return of 71.4 per cent over the same period. Instead of trying to make money on exciting stories, it’s safer to invest in boring, proven businesses.
Myth No. 5: You need help
Many people believe that finding a good adviser is essential for investing success. The right adviser can indeed help some people achieve their goals by choosing suitable investments and holding their hands through turbulent times. But it’s also true that many investors become wealthy by building a simple do-it-yourself portfolio of blue-chip stocks or index ETFs and learning to roll with occasional bursts of volatility, which are a normal part of investing. Once you master the art of staying calm and tuning out the noise, you’ll discover how easy – and profitable – investing can really be.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.
John Heinzl