Assumptions You Should Not Make When Investing In The Stock Market
Many commonly held beliefs about stock market are not just incorrect; they’re financially dangerous.
These myths distort how people approach stock trading, leading to poor decisions, missed opportunities, and unnecessary risk.
Understanding what not to believe is just as important as knowing what to do.
Key Takeaways – Stock Market Myths
- Past performance guarantees future results
- I can time the market
- High risk always equals high reward
- Hot tips and insider information will make me rich
- I need to beat the market to be successful
- Picking the best stocks is most important
- The stock market is rigged against small investors
- I need a lot of money to start investing
- A falling stock will eventually go back up
- Investing is like gambling
- Diversification is unnecessary if I pick the right stocks
- I think the economy is bad, so therefore stocks are bad
- I knew the stock market would fall; I should have trusted my gut and sold
- Good trades = skill; Bad trades = bad luck
- I need to understand everything before I can invest
- I can’t lose money in “safe” investments
- I’ll start later and still be fine
- Emotions don’t affect my investment decisions
- I need to constantly monitor and trade to succeed
- Tax implications don’t matter much
- I should buy that I know and use
- Dividends are better than capital gains
- Once I retire, I should move everything to conservative investments
1) “Past performance guarantees future results”
A common mistake is chasing recent winners while abandoning underperforming assets, which often means buying high and selling low as you gravitate toward overpriced markets and flee from cheaper opportunities.
Markets are cyclical, and what worked in the past may not work in current conditions due to changing economic factors, competition, or company fundamentals.
This is why indexing and dollar-cost averaging are commonly considered best practices for most.
Related: Should I Use a Financial Advisor?
2) “I can time the market”
Many investors believe they can predict when to buy low and sell high.
Even professional fund managers struggle to time markets successfully.
Investors who try to time the market often miss the best trading days, which can dramatically reduce returns.
The cost of being wrong about timing typically outweighs any potential benefits.
Academic Studies
One of the most definitive academic works on this topic is “Black Swans and Market Timing: How Not To Generate Alpha” by Professor Javier Estrada of the IESE Business School.
Analyzing over a century of daily returns for the Dow Jones Industrial Average, Estrada found that missing the 10 best trading days from 1900 to 2006 would have reduced the final portfolio value by a staggering 65%.
In a broader analysis of 15 international markets, missing the 10 best days resulted in a portfolio that was, on average, 50.8% less valuable than a simple buy-and-hold strategy.
Estrada’s work highlights that a “negligible proportion of days determine a massive creation or destruction of wealth,” concluding that “the odds against successful market timing are just staggering.”
3) “High risk always equals high reward”
Not all risk is compensated with return.
And risk and return aren’t 1-to-1 correlated.
Taking more risk doesn’t guarantee better outcomes – it simply means more uncertainty.
Some risks, like concentration risk or timing risk, offer no additional expected return.
Thinking in terms of probability distributions, fatter right tails typically accompany even fatter left tails, where the reward isn’t commensurately compensated and may lead to risks that shouldn’t be tolerated.
Smart investing involves taking compensated risks (like equity market risk) while avoiding uncompensated risks through diversification and proper asset allocation.
4) “Hot tips and insider information will make me rich”
Acting on rumors, social media hype, or supposed “insider” knowledge is extremely risky.
All information is already in the price.
Retail investors almost never have insights that institutional professionals haven’t already identified, and they often lack the skill to act on it profitably.
Professional investors have more information, better analysis, better technology, and better execution.
Moreover, most of the US stock market, and most developed markets, are traded algorithmically, which can process more information more accurately and less emotionally than any human could.
Worse, following unverified tips can lead to investing in stock promotions, pump-and-dump schemes, or companies with hype-driven narratives to cover up poor fundamentals.
5) “I need to beat the market to be successful”
Matching market returns through index investing has historically built substantial wealth over time.
The pressure to outperform often leads to costly mistakes like excessive trading, concentration in trendy sectors, or chasing performance.
The S&P 500 has delivered approximately 10% annual returns over long periods, which is more than sufficient for building wealth when combined with consistent saving and time for compounding to work.
6) “Picking the best stocks is most important”
Your savings rate is the key driving variable.
Aligning your portfolio with your specific financial goals and timeline while maintaining proper diversification will consistently build wealth over decades.
Stock picking and market timing are speculative activities that even professionals struggle with and often destroy long-term returns.
The difference between saving 10% versus 20% of income will almost always have a far greater impact on wealth building than the difference between earning an extra couple percent in annual returns from stock picking – if it works.
7) “The stock market is rigged against small investors”
Markets aren’t perfect, but this belief can prevent people from accessing the same wealth-building opportunities that have worked for long-term investors of all sizes.
While high-frequency trading and institutional advantages exist, they primarily affect short-term price movements.
Long-term investors benefit from economic growth and corporate earnings regardless of these market inefficiencies.
Index funds provide equal access to market returns for investors of any size.
8) “I need a lot of money to start investing”
You can start with small amounts today with fractional shares and no-minimum brokerage accounts.
Many brokerages allow you to invest with as little as $1, and automatic investing features make it easy to build wealth gradually over time.
9) “A falling stock will eventually go back up”
This assumes every company will eventually bounce back, but many stocks decline due to permanent problems like business failure, bankruptcy, or becoming obsolete.
Companies like Blockbuster, Kodak, and countless others never recovered from their declines.
Look at the “best companies” every 25-30 years by market cap and you can see that they change – e.g., almost all of the top 10.
Accordingly, they can lose most or all of their value forever.
This is why diversification matters – while some individual companies may fail, broad market indexes recover because they replace failing companies with growing ones.
10) “Investing and trading are like gambling”
Unlike gambling, investing builds ownership in productive businesses/assets/stores of value that can grow and compound over time.
Trading requires a repeatable, statistical edge that you can execute.
11) “Diversification is unnecessary if I pick the right stocks”
Some investors believe they can identify sure winners and concentrate their holdings.
This ignores the reality that even great companies can face unexpected setbacks due to factors beyond their control – regulatory changes, technological disruption, management scandals, or simple bad luck.
Lack of diversification exposes investors to unnecessary idiosyncratic risk.
Even Warren Buffett, one of history’s greatest stock pickers, advocates index fund investing for most people because picking individual winners consistently is extraordinarily difficult.
12) “I think the economy is bad, so therefore stocks are bad”
Operating off headlines and gut feelings is not a great idea.
Any information is likely already reflected in current stock prices, so avoiding stocks based on widely known economic concerns often means missing opportunities when markets recover from already-discounted pessimism.
In general, amateur investors rarely possess information that professional fund managers with research teams and institutional resources don’t already have, and even if they did, they typically lack the trading expertise and risk management skills to capitalize on it effectively.
Markets are forward-looking and often bottom before economic data improves.
13) “I knew the stock market would fall; I should have trusted my gut and sold”
This feeds dangerous hindsight bias where you recall any hunches that may have been right by pure luck but forget all the times your instincts were wrong.
This can build false confidence that leads to poor future outcomes.
14) “Good trades = skill; Bad trades = bad luck”
This self-serving bias prevents investors from learning from their mistakes and leads to dangerous overconfidence.
In reality, short-term investment outcomes are heavily influenced by randomness and market volatility.
Attributing wins to skill while dismissing losses as bad luck creates a false sense of ability that encourages more speculative behavior.
Even professional traders experience long streaks of losses despite their expertise.
True investment skill is measured over years or decades, not individual trades, and requires honest assessment of both successes and failures to improve decision-making over time.
Analogy
In the same way, a professional poker player has a very small statistical edge over amateurs who barely know the rules on the timescale of a single hand.
Edges accumulate over time.
If you go to the casino and bet on black on the roulette wheel, a successful role isn’t skill/”I knew it” and an unsuccessful role isn’t bad luck.
It’s simply playing a game where the odds are structurally against you and playing enough will lead to losing results.
But in the short term, there’s variance and that’s what keeps unskilled participants coming back.
This is why indexing is so popular among individual investors. You get 50th percentile results.
15) “I need to understand everything before I can invest”
Waiting for perfect knowledge often means never starting.
Simple, diversified index fund investing doesn’t require expertise and can be more effective than complex strategies.
16) “I can’t lose money in ‘safe’ investments”
Bonds, CDs, and savings accounts carry inflation risk (and you pay taxes on the interest).
Your purchasing power can decline even if the nominal value stays the same.
For example, if you have a 5% nominal return, but there’s a 4% inflation rate and you have a 20% effective tax rate, your real return is zero (holding its buying power only).
During periods of high inflation, “safe” investments can actually lose purchasing power over time.
17) “I’ll start later and still be fine”
Everyone has different life circumstances.
But delaying sacrifices the most valuable asset in investing: time for compounding to work.
18) “Emotions don’t affect my investment decisions”
Many investors underestimate how fear and greed influence their choices.
During market downturns, fear leads to panic selling at the worst possible time.
During bull markets, greed drives investors to take excessive risks or ignore warning signs.
These emotional reactions consistently harm long-term returns.
The most successful investors develop systems and discipline to counteract these natural human tendencies, often through automatic investing and predetermined rules about when to rebalance or make changes.
19) “I need to constantly monitor and trade to succeed”
Frequent trading typically reduces returns due to transaction costs and poor timing decisions.
Many successful long-term investors actually achieve better results with a buy-and-hold strategy, making fewer trades and letting compound growth work over time.
Studies show that the most successful investors are often those who forget about their accounts or those who have died, because they avoid the temptation to tinker with their portfolios based on short-term market movements.
20) “Tax implications don’t matter much”
Ignoring tax-advantaged accounts, tax-loss harvesting, and the difference between short-term and long-term capital gains can definitely reduce net returns over time.
21) “I should buy that I know and use”
Loving a product or company doesn’t make it a good investment.
Personal familiarity can create overconfidence and lead to poor diversification.
I use Apple products daily, but that doesn’t mean Apple stock is undervalued or that it should be 20% of my portfolio.
If you like your Tesla, great, but same thing.
22) “Dividends are better than capital gains”
Dividend-focused investing can lead to tax inefficiency and concentration in mature, slower-growing companies.
Total return matters more than how it’s distributed.
23) “Once I retire, I should move everything to conservative investments”
Retirees may need growth investments for 20-30+ years.
Going too conservative too early can lead to running out of money.
A 65-year-old might live to 95, requiring their portfolio to last three decades and potentially needing to outpace inflation over that entire period.