We all know somebody who thinks they’re the smartest person in the room. They know the best vacation spots, the hottest bands—and the best wealth building ideas. But just because they know the difference between echidnas and enchiladas doesn’t mean they’re a financial wizard. Chances are you’ll run into one of these people at a holiday party. So to help you avoid bad advice, here are five financial misconceptions to watch out for.
1. You can’t lose by doing ‘X.’
Whether it’s Bitcoin, tulips or rental properties, you likely will hear about something that’s a “sure thing.” Well, as the saying goes, “If it sounds too good to be true, it probably is.”
Humans are wired to love the big score. When we hear of a great idea that can’t miss, it’s often tempting to jump in. Usually, if someone is touting the next big thing, they often are either misguided or there is something about the idea that benefits them personally.
Wealth building is best done slowly and consistently. Shooting for the big score is a recipe for disappointment.
2. A great stock can make your account really grow.
Often people look for one big idea to take an investment account to the next level. “If only I had put everything in Apple Computer in 1998,” for example.
But it’s extremely difficult to find just the right company at just the right time. When you hear stories of great success with a single stock, they’re often like fishing stories. You hear a great tale about a huge success that happened to somebody else at some other time.
I believe that the most consistent path to investment growth is appropriate asset allocation and regular additions over time. That way you diversify your investments and don’t take the risk of relying on a single company.
3. You have to get debt free.
Many of us have been told by many different people over many years to avoid debt. My parents were raised at the end of the Great Depression and they are programmed to avoid debt. They have good reason. Many people got hurt by too much credit during the Depression. And today, when debt comes from a high interest credit card or a high interest car loan, you are hurting yourself.
But many mortgages today are near 4 percent annual interest. The average home increases in value by 3 percent per year over time,and mortgage interest payments are currently tax deductible. So, that makes mortgage debt good debt.
If instead of rushing to pay off the mortgage, you can create a cash reserve to buffer you from the next unexpected $5,000 home repair, then you’re in good shape.
4. My successful friend or family member has great financial advice.
Just because you know someone who appears to be successful, doesn’t mean they are a great source of advice. First, they may not be as successful as they seem. Second, they may have gotten their success by luck or accident or birth, and not through good choices. So, be sure to get the background before you decide somebody is an expert.
When taking advice from friends and family, ask yourself a few questions: Have they been successful financially? Really? Do they have your best interests in mind? Would they benefit if you followed their advice?
If somebody is recommending a business venture, it’s likely that advice is helping them more than it helps you. Always do your research before investing money in anything.
5. Any financial advisor can help me reach my financial goals.
Many people assume that all financial advisors are working to do what’s best for the client. But it’s simply not the case. Many financial professionals are paid to sell products. They may be well intentioned, but if someone works at the Ford dealership, they aren’t going to tell you about a great Toyota.
With financial professionals, you want two things:
First, a financial planner who works exclusively in your best interest—a fiduciary financial planner. Such an advisor will gladly provide a code of ethics that states his or her commitment to fiduciary duty.
Second, you want a planner that only gets paid by you—a fee-only financial planner. Many financial professionals provide a range of services. Sometimes, they act as a fiduciary and other times they are acting as a sales representative. With a fee-only advisor, it’s simple. They only get paid by you. They only work for you.
If you come home from your holiday parties with new questions about your financial goals and game plan, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans.
Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.
Who Needs Friends?
