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Time to BUST Some Investing Myths 💣

Heard of the Greater Fool Theory? It is when one can make money from an investment by selling it to a ‘greater fool’ at a higher price, irrespective of whether the investment is fundamentally sound.

This theory is often used to explain speculative bubbles, where prices rise to unsustainable levels before eventually crashing back. The fundamental ecosystem thought of such a situation is that there is collective foolishness, and participating in it may not really make much sense.

Collective wisdom (or the lack of it) usually also leads to myths. But let's save ourselves time, energy and money by adding some logic to common myths.

Myth #1: Pick a High-Rated Fund 🎩

It's a common misconception that choosing a highly rated fund would lead to higher returns. But that's not always the case. Indeed, there are cases where investors would do better by choosing a fund with a lower rating.

If a fund has been successful in the past, it is no guarantee of future success. Fund managers move, active returns are highly (or fully) linked to the managers’ skill, investment philosophies change, and success is rarely consistent.

As a result, it's crucial that investors undertake their own due diligence and not rely just on ratings when making investment decisions.

Myth #2: Insurance is Essential ⛑️

When you have people that depend on you, it's prudent to have insurance. Those who rely on your earnings right now will be provided for monetarily after your death. Great proposition.

But, insuring a young child? How does that make any sense? They are reliant on you, rather than you on them. Insurance firms do sell such products, but you shouldn't buy them.

Similarly, it doesn't make sense to buy insurance if:

  • You are self-sufficient and your loved ones do not rely on you financially (like a retiree)

  • If your children do not rely on you financially (like a stay-at-home parent),

  • Your debts are paid off and your dependents are provided for

There is a plethora of insurance policies for kids out there. Policies that promise to keep paying out even after the kid turns 18. Those costly premiums may not be worth it.

There’s a difference between investing and insuring, and that’s all you need to keep in mind.

Myth #3: Start Early and Take Risks or You Are Done For 🏃🏻‍♂️

This moral usually goes with the following story.

When Hardik was in his twenties, he started saving. He invested for 10 years and eventually stopped. Yash on the other hand, began saving at the age of 30 and continued to do so for the next 25 years. Hardik was still financially ahead of Yash. The earlier you start putting money away, the better off you will end up.

In a mathematical sense, yes. You are invested for longer, and the ‘magic’ of compounding works. Also, when you’re younger, you can take riskier bets, and get better long-term returns.

However, in practice, things are not always as they appear. Young people barely make enough to cover basic expenses, let alone put anything away. Trying to save up can lead to missing out on some of the most formative experiences in terms of travel, friendship, and lifestyle.

If you didn't have the means to save at the time, does that mean you'll have to save for the rest of your life? Obviously not.

  • Priorities change with age, and discretionary expenses (as a percentage of income) usually go down dramatically as age increases. This usually leads to a potential to save or invest more.

  • A greater amount put aside changes the game significantly when it comes to investing. Even if you put the larger sum into something as dull as a fixed deposit, you still might come out ahead.

Take heed of no one who tells you that you have to gamble or put money away at an early age if you want to succeed. You can begin at any time, and you will likely discover a method to succeed monetarily without having to go completely crazy.

Myth #4: Track Your Money Every Single Day💰

Apps that assist you to keep tabs on your finances on a daily basis can be more of a hassle than help sometimes. The flashing red or green lights serve as a constant reminder of your financial standing.

They keep fluctuating, making you question whether or not you should sell "I made Rs. 50,000 on this stock, but now I'm down Rs. 10,000, should I sell before it falls further or buy more?"

Except if you're a short-term trader, it's not worth your effort to check in on your investments too frequently. You need to wait before reassessing your investments if you're investing for the long run.

As a general rule, if you invest in ten different things and then leave them alone for a long time, half of them are likely to fail. In any case, the remaining ones will probably have expanded to the point where they provide a very healthy return on the overall investment.

Have faith in the calculated choices you made and give your investment plan enough time to bear fruit.

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