Since the beginning of time, long before Benjamin Franklin came up with the aphorism, “A Penny Saved is a Penny Earned”, people have been giving, and receiving financial advice, particularly about investing. Some investing advice is sound, and some–not so great. Over the average person’s lifetime they see thousands of financial investment articles in print and online, listen to numerous talking heads, and perhaps even sit down with a financial advisor.
Many consumers who make great decisions in the supermarket about value for their money listen to myths and falsehoods when it comes to laying down large amounts of cash. For newbies to investing, it can seem like an arena full of hungry lions, and you are a lamb. Investment choices can impact whether or not your children will have a college fund, and how well you will be able to retire.
Along with the sound advice are several myths about investing that are poorly substantiated and have little factual value for the average investor. Here are 20 such myths.
1. Anyone who calls him or herself a “Financial Advisor” is trustworthy
These days, nearly anyone can call themselves an investment advisor. According to Bankrate.com, “Investment advisers who call themselves fiduciaries are held to a higher standard than simply suitability. Fiduciaries must legally act in the best interests of their clients.” This means that other advisors may give some solid investment advice, but beware of those pushing a particular investment vehicle or product, even if they are fiduciaries, as they should, but may not, have your best interest at heart. They have their commissions on their minds, not your financial freedom. Ask questions about a particular product, analyze the history of a stock and don’t let anyone but yourself make the final decision.
2. You Can Count on Your Workplace Pension Fund
Back in the 1950s, a young person went to work, paid into a pension fund, and felt secure that they would be set for retirement. Workers who trusted this advice in the 80s, 90s and beyond got a rude awakening when they saw their pension investments go bust, or worse, having the money just disappear. When the economy went sour in 2008, many pensions went out the window. Plus, it takes years to become vested so that the company will match funds. In times of frequent layoffs, counting on a workplace retirement fund is not a great idea, unless you understand the risks, and have an individual rollover plan in case of sudden layoff. Cashing out a retirement fund early is a huge mistake, as you will pay through the nose in taxes for taking the money out of investment.
3. Don’t Bother If You’re Over 40, it’s too late to start investing for long term
Some folks who are in the middle of their working years feel as if they have missed the boat by not investing when in their 20s or early 30s. Yes, it’s often better to invest when you are young, but many who did had to start over after losing their shirts in 2008. It’s not just when you invest, but how you invest. Some people over 40 have had other demands on their income and investing early was a bigger challenge than they thought. Take stock of what you have to invest, and also invest in yourself by taking care of your health and protecting the nest egg that you have. Bottom line? It’s NEVER too late to invest.
4. Get In On The Latest Fad for Big Money
When the housing bubble was growing, everyone jumped on the bandwagon of home ownership. All of the experts told us so, and some banks made it easy for anyone to get a mortgage for much more house than they could afford. The bet was that the house would gain equity quickly so you could use your home as an ATM. Those who have made money on tech stocks and real estate knew when to get in and when to get out. Many were just lucky. The average investor does not have a crystal ball ability to do market analysis that will warn of a crash for the latest big thing (nor do analysts). IPO’s are also not a slam dunk to make money, as these stocks can fluctuate. Don’t just plunk your money down and let it sit there. Stay informed.
5. Put All Your Money In Gold–Right Now!
Those commercials are meant to scare consumers into thinking that America is in such as serious financial crisis that it’s going to turn into a third world country very soon and our paper currency will be only useful for bathroom tissue. That is what they would like you to believe, to scare you into putting all of your money in precious metals. The truth is that gold and silver, while being tangible assets, go up and down in market value just like stocks do. They’re not always the greatest hedge. They are merely another asset class with the same risk as others. They can be a great addition to a portfolio but by no means should be the only one.
6. Real Estate Is Not Related to the Stock Market
REITs lost 38% in 2008 because the credit crunch and overly aggressive expansion plans hammered profits and dividends. REIT returns used to have little correlation with the stock market. Now they closely track it. It’s no secret that the whole thing “blew” at once, so there is definitely a correlation. Money can be made on rentals, but that depends on the price of the investment property, where it is located, and how well you screen prospective tenants. There are enough shows about “nightmare tenants” that may make you think twice before going for an investment property.
7. Funds Perform Consistently Well
You know the saying, “Don’t Base Future on Past Returns.” Just because a stock or investment fund performed well in the past, it is not a future guarantee. Some stubbornly stay put in a fund waiting for it to strike gold again like a dried up oil well and by that point they’ve already lost too much to gain it back. Still, many throw good money after bad, waiting for that comeback. They look for any hint on a news report or minuscule uptick to keep hope alive. Know when to cut your losses.
8. Those with Financial Smarts Can Outsmart the Market
Statistics show that it is more often luck, than skill that causes financial geniuses to beat their benchmarks, according to a study ” False Discoveries in Mutual Fund Performance. Measuring Luck in Estimating Alphas,” conducted by The Journal of Finance.” The article claims that Wall Street is good at “confusing luck with skill.” While there are some gurus out there that do in fact beat the market, remember that this is an extremely small number. A number so small that you shouldn’t take the chance on believing that could be you. Put your money in an index fund and stop trying to beat the market.
9. Pay off Your Mortgage as a Sole Investment
Financial gurus often tout that paying off your mortgage secures your nest egg. People who sink all of their cash into their home while neglecting any other investments can find themselves in real trouble if all they have is an upside down valued home. Some can make money on real estate, and many do not. Homes are not easy to sell if you find yourself in financial straits, and liquidation on demand may be impossible.
10. You Need Tons of Money to Have a Financial Advisor
Sometimes people who need investment advice the most are intimated by commercials featuring people in suits in big, fancy mansion style homes entertaining their investment advisor over china cups and saucers. Often with a good referral, an advisor will waive his or her minimum and speak with you about your investment plan. There are also discount brokerages that cater to normal investors who don’t have hundreds of thousands to invest. Expect to be treated respectfully as a customer no matter how little you have to invest. If you encounter rudeness or condescension, take your money elsewhere.
11. Only Old Folks Invest in Bonds
Not necessarily. Having bonds in your portfolio is a good idea, as “bonds have never returned less than -3% in a month, while stocks have returned less than 3% on 41 different occasions, including four different months where they lost more than 10%.” Young folks can add bonds to diversify their portfolio and it may increase its overall value. A good rule is that the younger you are the less bonds you hold. But that doesn’t mean you abandon them entirely.
12. Its Hard to Begin Investing
Nothing can be further from the truth. Opening an IRA or investment fund is easy, if you have the right information and are clear about how much you want to invest. There are so many low fee brokerages out there that you can literally open up one within minutes, deposit money, and you’re off and running. Remember all you need is the price of a stock and commission and you’re off and running.
13. It’s a Dishonest Game
Many would be investors erroneously believe that the financial system is rigged. While things like high frequency trading and automatic buying and selling has definitely influenced the market, there are still solid investments out there. Many are brought up to believe that those in power lie, cheat, and steal their way to wealth and the little guy hasn’t got a chance. This myth is perpetuated by isolated cases of investor fraud and corruption. Yes, there are plenty of scammers out there but that shouldn’t discourage you from doing your own research and creating your own financial plan.
14. By Investing, You are Helping The National Economy
Not necessarily. Statistics from Hong Kong noted by Investor Juan mention that this is more myth than fact. When the US and Global markets crashed, people had tons of money invested, and the economy tanked anyway. Invest for yourself, and don’t depend on it to turn the economic tide. Economies are more influenced by individual spending rather than how much money is in the market. When people are making purchases, it’s generally a good sign. When people are holding their money, economies tend to be weaker.
15. The Riskier Your Investments the Better
Millennials in particular are encouraged to make high flown risky investments as they have lots of time before retirement and that is where the “big money” is made. There is nothing wrong with this type of investing but like all investments, do your research and by all means do not put all of your eggs in one basket. Like gambling, the more you bet, the more you stand the chance to lose–or win. Better to have a diversified portfolio containing some high yield and some more conservative investments.
16. It’s a Great Time to Invest!
Take that with a grain of salt as many financial advisors, particularly those looking to score a high commission on a particular product, will puff you up with what a good decision you are making–but you have to make it right now! If the “sales” approach seems like a rush job or you are pressured to make a quick decision, take your time and do your homework before investing. Investing always has risks and benefits, and there is no real “great time” to invest. There’s also no “bad time” to invest unless you have no money to invest. That’s really the only bad time.
17. Relatives are a Great Source of Financial Advice
Many consumers try to “Keep up with the Jones’s” or feel like they can’t go against their brother’s cousin’s advice, as he or she is smarter than they are. But remember, a family member might not see or appreciate the whole picture of your financial goals and current expenses to give you unbiased advice. Best rule of thumb? Rarely, if ever mix business with your family. It’s usually a recipe for potential problems.
18. Stocks That Perform Well Will Eventually Go Down
This is the reverse of the myth that stocks that go down will rise again. There is really no telling what will happen. Many investors missed out on getting shares of Apple on the basis that it had to go down eventually, and it didn’t. Fom 2005 to 2015 the stock went from $6 to $134 per share. At $70 a share no one thought that Apple would keep climbing. Those same people are now kicking themselves for not betting on the computer giant. Look at the company, not the stock price.
19. Investing in Spin offs From Big Companies Will Pay Off
Subsidiary companies often underperform parent corporations. This is mainly a subsidiary is where the company debt is held, so its not historically likely to make investors big money. However, that certainly doesn’t mean you can’t make money on a subsidiary. Like any other investment, you’ve got to do your research and see if you think this company holds a solid chance at doing well. Still though, you’re better off avoiding these companies.
20. Instead of Investing, Pay Cash for Your Car
There is a big push of consumer sites telling folks to avoid debt by paying cash for big ticket items. Cars, like homes, do depreciate, and often at a much faster rate. By taking out a car loan you not only keep more ready cash available for investing and/or an emergency fund, you also help build your credit.