Longheld Myths about the Share Market

Certain myths seem to persist over time. For instance- there’s the myth that there is a dark side to the moon. I blame Pink Floyd for this one! There is no dark side to the moon- it’s just the far side. Which has the same light and dark as the side we can see.

The share market is like the dark side of the moon for many Kiwis. Mysterious and unseen. But- if you are investing in Kiwisaver- you are most likely already investing in the share market.

There are many myths about the share market, and investing in shares too! They also seem to persist over time and from generation to generation. I’m going to cover some of these myths here.

The share market- or the stock market- whatever you want to call it- can be a scary thing for many Kiwis. I think one of the reasons why Kiwis love to invest in property is that they don’t understand the sharemarket. And to be honest- when I started out- I didn’t either. And I believed in some of the myths.

That’s why I want to cover some of the most common myths out about the share market that people worry about. And hopefully, once you have read them all, you might see the share market in a different light. Just like the dark side of the moon.


The Sharemarket is like Gambling

Myth 1: Investing in the share market is like going to the casino

It’s generally believed that investing in the share market is like gambling. That’s because on any given day the market either goes up or goes down, and we have no idea why.

We also see news stories about the impending crash that is always looming around the corner- with the accompanied personal story of someone who has lost it all.

It’s no wonder why its generally seen as gambling.

It’s true- that if you invest in a single share, you have a high-risk investment- you are somewhat gambling here. Day to day the price of that single share might go up and down. But over the long run- if you have invested in a solid company- it will track upwards. Just take a look at my investment in Genesis, which I track with Sharesight.

Tracking your investment portfolio using sharesight makes it easy
Genesis energy share price from 2014 onwards- a total of 36% gains. Tracked using Sharesight

But investing in the broader market is not as risky as investing in one company- that’s called diversification inside an asset class. Over the long term, you can generally expect the market to go up around 7-10%. The US500 has averaged around 9.8% and the NZX has averaged 7.8% over 69 years.

Of course, there is no guarantee and no investment is ever risk-free. You can expect the share market to correct every now and then. Expect corrections of up to 30% at least once per decade. But if that happens, you just need to be strong enough to not sell when the market is down. Just wait for the next recovery. It may take a long time,  of course. But this is all part of investing.


You Lose Money in Market Corrections

Myth 2: When markets correct you will lose money.

Over the long term, the sharemarket has delivered great returns. But to earn those returns you have to stay invested even through the corrections.

Many people believe that when a correction occurs you lose money. This myth is all over the news again. But what everyone forgets to mention is that you only lose money if you sell when the market has dropped.

The shares you own in the market might be worthless on paper right now- but that will only become a real value if you actually sell them. If you don’t sell them, you don’t lose any money. You can only lose money if you sell when the market is low.

And when the market is low- think of it not like a bad time to invest, because the market is dropping- its actually a time when the market is on sale. Meaning that if you pick up shares at the bottom of the crash you have the potential to gain value when the market will correct back to its long-time average.

Just look at any major market, and the major crashes- 7 to 10 years after the major market crashes the market will have recovered beyond its previous high value. Just look at the NZ market, with major crashes in 1987 and 2008- and where the market is today. You could be the worst investor ever and still make money.

What if you were the worst investor of Money in index funds the NZX-50 1949-2018 buying at the worst times- a simple way to beat this is to use dollar cost average

It’s Only for the Smart and Rich

Myth 3: You need to be smart or rich to invest in the share market

Many people think investing in the sharemarket is only for smart finance and rich guys. This is an old myth really.

Investing in the share market is not just for rich people. You’re probably investing in the share market right now through your KiwiSaver.

You don’t need a lot of money or be an investing genius. There are many ways for you to invest in a broad index fund covering many markets. It’s a completely passive investment- no need for any research. And you don’t need to have a lot of money. You can invest as little as $50 per week.

You can invest in an index fund through many of the fund providers. Hatch, InvestNow, Simplicity to name a few. They all offer different index funds which are passive. You can just drip-feed money into these funds and gain market returns.


But my Mate lost a lot of Money

Myth 4: Anecdotal evidence of people losing money mean everyone will lose money

Everyone knows someone that has a story of losing money. That they gambled in the sharemarket and lost.

If anyone ever tells you that they put down a punt on the sharemarket and lost- and they go on to tell you to avoid the sharemarket altogether- ignore them!

Many people go into the sharemarket and lose all common sense. They see shares with high double digits historical returns and think they’re in- but within a few months- the price corrects. They lose money- on paper. Get scared that it will drop further and promptly sell.

This is called buying high and selling low- avoid this at all cost!

Don’t approach investing in the sharemarket like your buying a lotto ticket! Buying a bit of this and a bit of that and hoping that one of them goes to the moon. That’s not investing- that’s gambling.

The odd of losing money in the share market over the long run is actually pretty low. If you buy the entire market thought an index fund the odds of losing money over any 10 year period from 1949 to 2018 is less than 5%. And over any 25 year period- you wouldn’t have lost any money- just enjoyed the 8% return.

Odds of Losing Money in the NZX-50 1949-2018- Investing in Index funds is a safe way of gaining good returns on your money.

It’s easy to Beat the Market

Myth 5: If you know what your doing you can beat the market

Many people believe that they are oracles when it comes to investing in shares. They know which shares to buy and believe that they can beat the market.

There’s a reason that there’s only a handful of Warren Buffets around the world.

Then there are the people that believe that their fund manager will beat the market.

However, there are many studies to show you that active fund managers often have returns lower than passive index funds. And the active fund managers will charge you extra in fees for the privilege.

This is one of the main reasons why passive index style investing has become so popular today. Low fees, and returns that match the entire market. Whereas active fund managers as a whole tend to underperform in the long term and charge higher fees.

Stock-picking pros are not stupid. They are just expensive -John Bogle, founder, Vanguard


Sharemarket Myths

Just scratching the surface

This is just a brief list of 5 shares market myths out there- but there are many more, such as;

  • The share market always goes up
  • A share that has gone up will go down
  • A high priced share will go down
  • A good company will always have a good share price
  • Higher returns always mean higher risk
  • An IPO is a guaranteed good return
  • You should invest in shares that are “hot”

If you believe in any of these myths and the confusion around then you might be more likely not to invest in the share market. Especially the myth that you need tens of thousands of dollars to be able to invest in the sharemarket.

It is important that your base your investing strategy on strong facts instead of anecdotal evidence that people present you. You should be sceptical when you read things about the share market. Hell- be sceptical about what I’ve written. But, do not let myths hinder your share market investing!


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