People averse to investing and even some experienced shareholders can labour under false impressions of what is really involved in owning a portfolio of shares.
Choosing and managing shares yourself is generally more challenging than sticking your savings in funds, where professionals make all the decisions – although many investors find the hands-on approach more fun.
We asked financial experts to tell us the fears and myths they often come across about share investing, and to explain the reality beind them.
Find out the truth: The biggest fears and fallacies about share investing, and the reality
1.
I’ll lose all my money if my shares go down
You’ll only lose money if you sell your shares when they are down, points out Danni Hewson, financial analyst at AJ Bell
‘If you keep hold of them chances are the shares will recover in value over time, especially if the fall is a result of a market correction rather than a company specific issue.
‘Investing isn’t about the quick win, it’s about the long term.
The best gains tend to be made by investors who patiently reinvest dividends into their stock of choice, increasing the size of their investment and therefore their ultimate return.’
But Hewson cautions that you can’t blindly assume a good business will always be a winner, and sometimes a short sharp shock is just the beginning of a downward trend.
Ed Monk, associate director of personal investing at Fidelity International, says: ‘Any investment comes with the risk that you’ll lose money, but it can be easy to get the risk out of proportion.
‘At the aggregate level, even big disasters in markets rarely lead to investors losing all their money.
The FTSE 100 fell about 44 per cent during the financial crisis – an historic crash – but investors lived to fight another day.’
Danni Hewson: You can’t blindly assume a good business will always be a winner
Monk says that when you buy individual company shares, you do have to consider the possibility that catastrophe may strike and one of your holdings could be wiped out, and this is why it it important to diversify across lots of companies.
He adds that another practical step you can take to reduce the risk is a ‘limit order’ – sometimes called a ‘stop-loss’ – which is an instruction you can give your investment platform or broker to buy or sell a stock when it hits a specified price.
‘You can set a limit order to sell a stock you own if it falls 10 per cent, for example.
You may still have confidence in the stock at that stage and want to hold – or even buy more – but the limit order ensures you won’t stay invested in a stock that’s in freefall.’
2. Jumping the latest bandwagon brings big rewards
‘Just because everyone is investing in something doesn’t mean it’s a sure-fire winner,’ says Hewson. ‘In fact that’s often the time you should take a step back.
‘A hot tip might generate lots of interest which will push the share price up in the short term and people who invest early may make a lot of money.
‘But if they then jump ship and the share price falls, other investors might also get spooked and sell quickly which just helps the share price plummet further.’
Hewson says ‘FOMO’, baccarat casino fear of missing out, is not a good investing strategy and you should do your own homework.
Or, you could look at investing in funds where a manger makes the decisions, or trackers which simply replicate an index, particularly when you start out.
3. There are short-cuts to investing riches
A lot of coverage of investing focuses on the huge gains made by a lucky few, notes Monk.
‘This is not the norm and it’s important to set your expectations at a realistic level.
That way you’ll be less tempted to chase blockbuster returns that rarely materialise and often end in disaster.
‘An annual return on your portfolio of, say, 5-10 per cent may not set your pulse racing but that’s the level that history suggests is likely.
It’s when returns at that level get compounded year after year that gains really begin to grow.’
Monk says that when you are buying shares, you should understand that every choice you make doesn’t have to be a runaway winner, and that it is better to mix companies of different sizes, sectors and styles to ensure a more diversified and consistent return.
4.
Investing in shares is just gambling
‘Investing great Benjamin Graham once said “In the short run, the market is a voting machine, but in the long run, it is a weighing machine”,’ says Nick Hyett, equity analyst at Hargreaves Lansdown.