Ten Myths About Money That You Cannot Afford to Ignore

by Hank Coleman

1.   Actively Managed Funds Outperform Index Funds.  Actively managed funds can charge annual feeds of 1 to 3% and higher.  Index funds, on the other hand, typically charge 0.5% or less. Thousands of active mutual stock funds fail to beat their benchmark indices over the long term.  It is ironic that most of us invest in mutual funds because we can’t or don’t think we can pick great individual stocks, but for some reason we think that we can pick great mutual fund managers.  Isn’t that almost the same thing?  Another drawback of actively managed mutual funds is that some funds are actually “closet index trackers” that follow or mirror their chosen benchmark index while charging active management prices. There are fund managers who have consistently outperformed the market, but they are a minority.

2.   You Can Time The Market.  According to a 2005 study entitled “A Comparison and Evaluation of Market Timing Strategies”, researchers found that one form of market timing beat a buy-and-hold strategy before transaction costs and taxes by only 0.2% a year.  Another study found that if you had owned the S&P 500 from 1983 through 2003, but somehow managed to miss the 30 worst days during that period, you would have earned an annualized 19%.  That is almost double the 10% return that would have been earned from a buy-and-hold philosophy.  Another portion of the same research shows that if you missed the 20 best days over the period, your return would have been sliced in half, to 5% annualized.  So, catch all the up swing and earn 19%, catch all the bad days and earn only 5%, or do nothing and earn 10%.  Good luck figuring out when the good days are coming!

3.   You Can Wait To Start Saving For Retirement.  Many young workers say that they will save more when they start making more income in a few years.  This is one of the worst things a young investor can do.  The most important attribute that young investors have on their side is time.  I cannot stress the power of compounding interest and its effect on our retirement portfolios.  Delaying investing for retirement by just four years can cost you $400,000 in missed retirement savings in later years. 

4.   Gold Is The Best Hedge Against Inflation.  The gold bugs on the radio and television commercials want you to think that gold is going to be our savior to this financial crisis.  But, gold is an okay hedge against inflation and calamity at best.  Since the United States took the dollar off of the Gold Standard in 1933, gold has only returned 4.5% per year ($34.69 in 1933 to $969 in 2009) which is barely keeping up with our country’s historical inflation rate.

5.   Buy and Hold Investing Is Dead.  Buy-and-Hold is the safest way to own stock because it removes the whims of emotions.  Too many people misinterpret it as “buy-and-hold-on-no-matter-what”.  That kind of thinking that leads to holding on to the losers in your portfolio for way too long.  Even Warren Buffet does not advocate buying and holding a stock forever. When considering buying stocks for the long term, you should consider sticking it out for as long as it takes your investing thesis (or reason you bought it in the first place) to fully pan out.

6.   You Can Solve All Your Debt Problems By Consolidating Them.  Consolidating your debt may help you with reducing your monthly payments, but it does not get to the heart of your money problem.  Consolidating debt just shifts debt around from one lender to another.  Now you just have fewer of them.  It does not tackle the larger problem of why a person is getting into debt.  Borrowers run the risk of racking up the individual debts again after consolidation leading to higher and higher debt loads.

7.   Buying a House Is Always Better Than Renting.  It makes sense to rent instead of buying when your budget won’t accommodate the extra monthly home buying costs, such as property insurance, maintenance, and taxes. If you can’t accept the idea you will have to fix an overflowing toilet, then maybe you should still rent too.  Also, the transaction costs of buying a home and then eventually selling it are huge.

8.   Living Costs Will Fall In Retirement.  It’s not uncommon to add an additional $5,000 to $10,000 to your yearly budget during retirement for trips, hobbies, and other things you haven’t had the opportunity to do while you were working for a living.  Personally, I plan to play golf every morning, and that’s definitely more expensive than the life I am currently living.

9.   Investing In Stocks Is Like Gambling.  This statement could not be further from the truth. Investing is not gambling, far from it.  Investing in stocks wisely takes skill, knowledge, patience, and hard work.  Investing is when you put your money to work in something productive as part ownership of a company with the hope of earning a return. Gambling is putting your money at risk in a game of chance with the hope of winning a quick profit.

10.  The Reward Points On Your Credit Card Are Worth It.  How much in interest charges, annual fees, and other miscellaneous expenses will you pay along the way just for the right to earn rewards points?  Unless you are a big spender, you may never make your money back from the fees.

Grab Our RSS Feed! Receive Posts By E-mail

{ 3 comments… read them below or add one }

Jason September 9, 2009 at 3:09 pm

While the price of gold has only increased 4.5%/year when averaged from the end of the gold standard to today’s prices, the return on investment in gold since 2001 is anything but an 4.5% linear curve, its nearly exponential. While I’m not an advocate of investing in precious metals, its hard to ignore that kind of performance over the last 8 yrs.

Jason

Evolution of Wealth September 13, 2009 at 7:37 am

I think Jason makes a good point. It reminds me of tech in the late 90s and the housing market a few years ago. Both over a long period of time have lower return numbers then but with the right time frame had huge returns. So is gold destined to follow the other two?

I particularly like #8 as I think people are brainwashed to believe that their spending will go done. Times have changed and they are still planning off the basis of their grandparents who had short retirements which consisted of sitting around the house because 70 was todays 90 or maybe even todays 100 it seems.

The scariest I think is #9. I agree with you for the most part. If a person doesn’t have “skill, knowledge, patience and hard work”, what is it then? Does it become a horse race? The person reads about the past performance and maybe one writer’s take and then they through their money in.

Peter Luke September 15, 2009 at 8:04 pm

I found your article entertaining as it is useful. Number 7 is particularly true and relevant to the present economic situation. This point just can not be ignored.
My Well Of wealth

Leave a Comment

Previous post:

Next post:

Copyright © 2007–2017

WordPress Admin

css.php