Seven investing myths debunked for 2023

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Investing can help your savings beat inflation and even provide a new income stream - but it's shrouded in myths that stop people getting started.

You might see investing as a pastime reserved just for stock market fanatics and the super rich, but many savers could benefit from it.

Traditional savings accounts, even with the higher interest rates we’ve seen over the last few months, can’t keep up with soaring prices. This means that even though your money won't go down, you won't be able to buy as much with it and so its value will decrease in real terms. 

Investing gives you a chance of getting a higher return, though you could also lose money.

Here we debunk some investing myths and de-mystify the world of stocks and bonds for those looking to make their start in investing.

Myth 1: investing is always the most financially savvy thing to do

While investments can be a valuable way to save towards a goal, now might not be the time to start for everyone.

You should pay off any high-interest debts, such as credit cards, overdrafts and loans, before you get into investing. Repayments on these debts are likely to be bigger than investment returns you might make, or you could end up making a loss and be unable to make the repayments at all.

You should also make sure you have an emergency savings pot in place.

By that we mean between three and six months worth of living expenses saved in an account you can easily access, to cover anything from sudden loss of income or the cost of repairing something essential. Don't invest this money.

Finally, think about your timeframes. To give your investments a decent chance of riding out market dips, you'll want to leave your money untouched for at least five years.

If you're likely to use it before then - for instance to buy property - it's better to keep it in savings accounts.

Myth 2: you need to be a stock market expert

Picking from a seemingly never-ending list of investment products can be a daunting task, especially when you’re not familiar with the terms commonly used.

Stocks and shares, also known as ‘equities’, are what we tend to think of when we talk about investing. You buy a share of a specific company, and you receive a proportion of the profits, known as dividends. 

This is one of the riskier investments because it is tied to the performance of the company. If they don’t make a profit, you don’t get any money, though if they do especially well you could get high returns.

But, you don't need to devote all of your time trying to predict the future, and researching which companies could be due for a profitable year - someone else can do that for you.

Asset management firms put together funds and investment trusts, made up of dozens or potentially thousands of individual stocks. They often share a specific theme. For example, you can invest in ESG funds, which avoid weapons manufacturers or tobacco companies.

Myth 3: investing is like gambling

All investing involves the risk of losing your money, but not all investments are similarly risky.

Everyone is comfortable with a different level of risk, so think about what you can afford to lose, and what amount of money you would be willing to lose. 

Stocks are riskier than bonds, so having more bonds in your portfolio will reduce how risky it is (but also the potential for returns).

If you’re investing for a longer period of time, for example for retirement that is far in the future, you can take on more risk, because your investments will have more time to recover. 

Myth 4: investing is free

Whether your investment portfolio is having a good year or a bad one, you'll have costs to pay.

You’ll most likely need to use an investment platform to manage your investments.

Depending on which platform you choose, you’ll pay a percentage of your investments or a flat fee, or sometimes a mix of both.

Choosing a platform with low costs for the size of your portfolio is one of the few things you can have control over when investing your money, so it's worth taking the time to look into it.

If you’re investing less than £100,000, it might be cheapest for you to go with a platform that charges a percentage, while for a larger portfolio, it tends to make sense to go for a flat fee.

There are also additional charges that can eat into your returns.

How charges could affect a £10,000 investment*

Charges Returns after 10 years Returns after 20 years Returns after 30 years
0% £16,289 £26,533 £43,219
0.2% £16,256 £26,480 £43,133
0.4% £16,224 £26,427 £43,047
1% £16,126 £26,268 £42,787

*assuming the investment grows by 5% each year

While costs can be a significant factor in your choice, they're not the only thing to consider. Different platforms offer different tools, and have unique strengths and weaknesses.

We reviewed the most popular investment platforms and picked two Which? Recommended Providers.

Myth 5: success is about 'timing the market'

When markets hit a downturn, it can be easy to panic and try to cut your losses by selling or changing your investments. But investing is volatile by nature, and you can miss out on the best returns by panic selling. 

Stick with your original goal for investing and you'll be better able to weather the inevitable financial storms.

One strategy to consider is 'drip-feeding', or pound-cost averaging, where you invest regularly every month instead of investing a lump sum all at once. This will allow you to get more for your money, regardless of any drops in the market.

Having a diversified portfolio is another great way to protect yourself against real world impacts on your investments.

For example, if you invested exclusively in the UK market, the past year might have seen your portfolio take quite the hit, whereas those also invested in other better-performing markets would have been more insulated from falls.

Myth 6: investment returns are tax-free income

You need to pay taxes on your returns from investments, just like income from a job - but the systems are a bit different.

Income from investments is taxed through dividend tax and capital gains tax, and you'll need to fill out a self-assessment tax return.

Both have tax-free allowances, but these are set to be reduced over the next few years. For dividend tax, the amount you can earn before you need to fill out a tax return is £1,000 for 2023-24. For capital gains tax, the allowance for 2023-24 is £6,000.

If you invest within an Isa or pension however, you don't need to worry about taxes or tax-free allowances.

Isa stands for ‘individual savings account’ and you can use them to save up to £20,000 a year. There are different types of Isas, including stocks and shares Isas, cash Isas, lifetime Isas, and junior Isas. Most investment platforms don't charge any extra to use an Isa.

With a self-invested personal pension (SIPP), you get up to £40,000 tax-free contributions each year.

Myth 7: you can invest without risk

There is no such thing as a risk-free investment.

Over the pandemic, there was a huge increase in interest in investing, and alongside that an increase in trends involving investing in specific stocks, such as GameStop. 

These trends are volatile and don’t lend themselves to long-term savings goals. Getting drawn into them could result in you losing more of your money.

Investing in cryptocurrencies, like Bitcoin, is popular but one of the most risky ways to invest, due to extreme price volatility and platforms bust, most recently FTX.

If an investment opportunity claims to be entirely risk-free, chances are it's a scam. investments are a popular front for scammers who want you to turn over a large sum of money.

Here are some questions to ask yourself to avoid getting caught in a scam:

  • Are you being pressured? Legitimate investment options will never pressure you, so always take your time and research. If they're telling you to invest now so you don't miss out, it could be a tell-tale sign of a scam.
  • Are they registered with the FCA? The Financial Conduct Authority (FCA) regulate financial organisations, so if you can't find the organisation in question on their database, your money won't be protected.
  • Have you talked to anyone else about it? Often our best line of defence against a potential scam is speaking to the people we trust, whether this is family and friends or a professional advisor who might spot red flags.


source https://www.which.co.uk/news/article/seven-investing-myths-debunked-for-2023-av5Hx9A4JmNk
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