The share market can be a confusing place, filled with misinformation. Let’s take a moment to debunk some common share market myths to help you navigate your investment journey with confidence.
Share Market Myth: Index Investing Ruins Market Efficiency
Reality:
Index investing can enhance market efficiency. It contributes to market efficiency because it helps ensure that prices reflect all available information. When investors buy index funds, they are investing in the entire market (or a segment of it), which means that stock prices are more likely to be accurate and reflect true value.
By increasing trading volume and participation, index investing can enhance liquidity, making it easier to buy and sell stocks without significantly affecting their prices. In turn, this helps maintain an efficient market.
Share Market Myth: Cash Products Are Risk-Free
Reality:
It’s not that simple! In Australia, the government guarantees deposits up to $250,000 (See our previous blog here), providing a safety net for your cash. However, products like Term Deposits and “cash plus” investments can carry different risks. For example:
Inflation Risk: If your Term Deposit earns 4% but inflation is at 6%, your purchasing power is actually decreasing.
Interest Rate Risk: Changes in interest rates can affect your returns, especially over time.
Growth Risk: While cash generates interest, it lacks growth. Over a 30-year period, many investors find cash to be one of the riskiest options, as it doesn’t grow in value and can lose purchasing power to inflation.
Share Market Myth: September Is Always a Bad Month for the Market
Reality:
There’s some truth here! Historically, September has been one of the weaker months for market performance, often following the busy reporting season when companies share their earnings.
But here’s the silver lining for long-term investors: if September sees dips, it might be a great opportunity to find bargains! As Warren Buffett wisely said, “Be fearful when others are greedy, and greedy when others are fearful.” For those who invest regularly, market downturns like September can allow you to buy more shares for the same amount of money.
Remember, investing is a long-term journey. One tough month is just a small part of a much bigger picture.
There are many more share market myths to explore, if you have any questions or concerns, please get in touch.
General Advice Warning - This communication has been prepared on a general advice basis only. The information has not been prepared to take into account your specific objectives, needs and financial situation. The information may not be appropriate to your individual needs and you should seek advice from your financial or tax adviser before making any investment decisions.
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