We asked our economics commentator to engage in some investment related myth busting. Here is part one: tomorrow he looks at myths relating to investing in tech and the economy.
Michael Baxter's Mythbusting: Investing Myths
There is something strange in the neighbourhood. Who you going to call? Mythbusters.
Investing is gambling
Investing in a truly diversified portfolio, taking a long-term time horizon and only withdrawing from the portfolio when its performance suggests that this is appropriate, is not gambling. History shows that this is one of the safest ways to accumulate wealth.
Putting all your money into one stock, no matter how much regard you have for that stock, is risky. Investing in stocks and shares in anticipation of being able to cash in next Tuesday, next month or even next year, is risky. Holding a portfolio as a kind in insurance policy, which you can withdraw from at a minutes’ notice to cover unforeseen circumstances is a form of gambling.
Cash is risk free
Cash can lose value. If you put your cash in a non-ISA deposit account, or bonds, and your net interest is less than inflation, then cash is a guaranteed way to lose money. To reiterate, even if interest rates are more than inflation, its interest after paying tax you need to consider –although cash held in an ISA is tax free, but subject to limits. Even then, if gross interest is less than inflation, cash means you risk losing wealth.
Investing is for the old
The sooner you start the better. Thanks to new technologies such as CRISPR, if you have recently entered the jobs market, then you might have 50 or even 60 years of working life ahead. During this time, technological changes will be so swift that you might have to re-train and start second, third or fourth careers. If you build up an investment portfolio and add to it each month, even if only modestly, you can eventually build for yourself a secondary income stream - such that work is something you do because you want to, or because of the luxuries it funds, rather than because you have to.
You need a lot of money to invest
If you are able to save £4,000 a year and invest into a LISA, (life time ISA) then with the government bonus, that’s £5,000 a year. Start saving at that rate when you are 30, then assuming an average five per cent return (after inflation, including capital growth and income re-invested), within 15 years, the portfolio would be worth £100,00, within 24 years, £200,000 and within 30 years £300,000. The income on £300,000 would not buy you the life-style of Rockefeller, but it would give you a tax-free income that would at least move you closer to financial freedom.
My portfolio is diversified, right?
Creating a truly diversified portfolio requires thought. Just because you have a dozen or so stocks it does not mean you have sufficient diversification. Neither will it suffice to simply have stocks operating in different sectors. Try and make sure your portfolio has exposure to non-correlated stocks – that’s stocks whose performance are not dependent on the same factors. Also look at regional diversification; and not just investing in companies that have exposure to correlated regions, such as the UK and US, whose economies often rise and fall in tandem.
Buy in the good times and sell in the bad times
A classic, all too human mistake is to sell when all around is gloom and buy when the market mood is euphoric. If you had bought stocks in 2003, or 2009, when investment sentiment was overwhelmingly negative, you would have made a killing.
As a late Lord Rothschild said: “buy when there is blood on the streets, even if some of the blood is your own.”
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees