Stocks: Common Preconceptions Fact-Checked

Many people think that investing in stocks is a risky game of luck. This moneyland.ch guide looks at common preconceptions about stocks and checks whether they are backed up by facts.

Preconception 1: Investing in stocks is risky

This preconception is not entirely incorrect. Stocks can drastically lose value at any time, and there is no guarantee that a stock will gain value.

But it is also true that you can radically reduce the risks associated with stock investments. That can be done by investing in a diversified global portfolio of many different stocks – using exchange-traded funds (ETFs), for example. It is also important that you have a long-term investment horizon. As a general rule, the more broadly diversified your stock portfolio is and the longer you hold your investment for, the lower the risk will be.

An ETF lets you invest in an entire stock market. Many ETFs replicate stock indexes like the Swiss SMI or the MSCI World global index. While widely-diversified stock market investments also do have a certain risk of loss, in the past they have normally delivered substantial returns over long terms.

Preconception 2: Investing in stocks is speculation

That is not necessarily true – as long as you invest correctly. Investing your money in just a few randomly-selected stocks without ongoing research is certainly a speculative activity. But spreading your investment capital out broadly across different stock indexes is far less speculative. Over the mid-to-long-term, well-diversified stock portfolios usually yield a return.

If you want to invest in individual stocks, you should first perform a thorough study of the companies that you want to invest in. The checklist for choosing a stock to invest in gives you step-by-step advice for investing in individual stocks.

Preconception 3: Investing in stocks is complicated

Many Swiss shrink back at the mention of stocks. Only a minority of residents invest in the stock market, as the Swiss investment survey by moneyland.ch shows. But you do not need a degree in finance in order to participate in the stock market. Those who hoard their money in savings accounts and never invest in stocks may miss out on substantial returns in the long run.

Investing in stocks and ETFs is not difficult. All you need in order to buy and sell shares in stocks and ETFs is a stock brokerage account at a bank or other stock broker. In many cases, opening an account can be done in just a few clicks. Using an affordable online trading platform is recommended from an investment-cost perspective. You can compare stock brokerage accounts using the moneyland.ch online trading comparison.

An even simpler way to invest in the stock market is to use a robo advisor. These digital asset management services normally invest your money in passive funds like ETFs. You can find more information in the guide to Swiss robo advisors. Another alternative is to use a conventional asset management service. These are more expensive than robo advisors, but you get consultation in person.

Preconception 4: Stocks are not a liquid asset

In most cases, this blanket statement is simply not true. If you need money, you can theoretically sell stocks that are listed on larger stock exchanges at any time during trading hours. That makes stocks a much more liquid asset than real estate and many other tangible assets.

But stock prices fluctuate constantly. If a desperate need for money forces you to sell your stocks, there is a risk that you will sell them when prices are low. In order to avoid losing money and missing out on potential future gains, it is crucial that you hold onto your stock investment for a period of many years.

You should only ever invest money in stocks if you can afford to live without that money for a long time. In order to be prepared for financial emergencies, it is advisable to build an emergency fund. This money should be kept in a place where it is readily available in full at all times – such as in a private account. You can find more detailed information in the guide to emergency funds in Switzerland.

Preconception 5: The stock market is unpredictable

That is at least partially true. There is no way to accurately predict the future returns of stock investments. But there are ways to reduce the unpredictability.

• Invest in many different stocks: The rule of thumb in stock investing is: Diversification is key. If you spread your money out across the whole stock market, your investment will not be dependent on the performance of just one or several companies. Over the long term, a diversified stock portfolio normally delivers substantial returns, although returns are never guaranteed.
• Analyze stocks before you invest: It is important to study a company before you invest in it. How do you feel about the company’s business model? What is the current state of the market that the company trades in? What are the stock’s price targets? It can also be advisable to analyze the stock’s fundamentals. Important: There is never a guarantee that your evaluation of the company is correct.

Preconception 6: Fund managers invest better

Banks and insurance companies heavily promote their actively managed mutual funds to their customers. The stated goal of these funds is to outperform the market as a whole thanks to experts who actively manage the fund’s investments. But in reality, very few fund managers manage to outperform the market over the long term. The only thing about actively managed mutual funds that is consistently high are the fees they charge.

Using index funds and passively managed ETFs generally makes more financial sense. These passive funds replicate the performance of stock indexes, and typically have much lower fees than actively managed funds.

More on this topic:
Compare Swiss stock brokerage accounts now
How to invest money in Switzerland
Checklist for choosing the right stocks
Checklist for choosing the right ETF