"20 money myths: busted!" first appeared on iafrica.com on 17 March 2010. It is the fourth most read "Financial fitness" article of the past year. Liked it? Get your finances in shape in 2011 - bookmark http://personalfinance.iafrica.com/.
- Myth (noun) a widely-held, but false belief
Are you struggling to make ends meet or drowning in debt? Do you find it impossible to save? Are your investments always underperforming the market? Chances are you're a victim of your belief in some patently wrong, yet widely-held, money myths.
There are plenty of money and investment 'truisms' that are so widely known and readily accepted that they're never questioned. Yet, some of them are just plain rubbish and will leave you out of pocket if you blindly act on them.
The fact that a belief is pervasive doesn't make it true. It's time to open your third eye and replace those wealth-destroying fallacies with the cold, hard truth.
Myth 1: Investing in shares is risky.
The truth? Well, it depends.
If you're hoping to make a quick buck by speculating then, yes, it's risky. If you're betting you whole nest egg on one or two stocks then, of course, it's risky. However, if you need your money to beat inflation over the long-term (at least five years, but preferably more than ten) and you're invested in a diversified portfolio of quality shares then the stock market is the least risky investment you can make.
How can I say that? Well, of all the asset classes, equities have consistently outperformed all the others over the long-term. Research conducted by Nedgroup Investments shows that if one looks at the South African stock market's total returns over monthly intervals of rolling five-year periods since 1961, not one of the more than 500 such periods was negative.
Looking past short- to medium-term fluctuations, a long-term investor mulling over her or his options for a retirement plan can hardly do better than the stock market as the risk of loss for periods longer than 10 years is close to zero.
Shares are volatile (their value can vary wildly from one day (or year) to the next), that's for sure. But volatility is not risk.
What is risk? Whatever the technical definition, I define it as the likelihood of my investments not achieving what they are intended to. In other words, I call it risky if an investment is unlikely to accomplish what I had in mind for it.
By this definition, and considering my goal of being financially secure in retirement, stock market investments are not risky; however, putting my savings in the money market is almost as risky as bungee jumping without a cord.
One could also define risk as 'the chance of losing money' or 'the chance of an investment not beating inflation'. If, like me, you're investing for the long term then by both these definitions stocks aren't risky, the money market is insanely risky, while bonds and property fall somewhere in between.