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- Myth (noun) a widely-held, but false belief
Are you struggling to make ends meet or drowning in debt? Do you find it impossible to save? Are your investments always underperforming the market? Chances are you're a victim of your belief in some patently wrong, yet widely-held, money myths.
There are plenty of money and investment "truisms" that are so widely known and readily accepted that they're never questioned. Yet, some of them are just plain rubbish and will leave you out of pocket if you blindly act on them.
The fact that a belief is pervasive doesn't make it true. It's time to open your third eye and replace those wealth-destroying fallacies with the cold, hard truth. Here are 20 money myths and the truth...
- Investing in shares is risky.
(Click here to read 'Shares: safe and sound')
The truth? Well, it depends.
If you're hoping to make a quick buck by speculating then, yes, it's risky. If you're betting you whole nest egg on one or two stocks then, of course, it's risky. However, if you need your money to beat inflation over the long-term (at least five years, but preferably more than ten) and you're invested in a diversified portfolio of quality shares then the stock market is the least risky investment you can make.
How can I say that? Well, of all the asset classes, equities have consistently outperformed all the others over the long-term. Research conducted by Nedgroup Investments shows that if one looks at the South African stock market's total returns over monthly intervals of rolling five-year periods since 1961, not one of the more than 500 such periods was negative.
Looking past short- to medium-term fluctuations, a long-term investor mulling over her or his options for a retirement plan can hardly do better than the stock market as the risk of loss for periods longer than 10 years is close to zero.
Shares are volatile (their value can vary wildly from one day (or year) to the next), that's for sure. But volatility is not risk.
What is risk? Whatever the technical definition, I define it as the likelihood of my investments not achieving what they are intended to. In other words, I call it risky if an investment is unlikely to accomplish what I had in mind for it.
By this definition, and considering my goal of being financially secure in retirement, stock market investments are not risky; however, putting my savings in the money market is almost as risky as bungee jumping without a cord.
One could also define risk as 'the chance of losing money' or 'the chance of an investment not beating inflation'. If, like me, you're investing for the long term then by both these definitions stocks aren't risky, the money market is insanely risky, while bonds and property fall somewhere in between.
- The money market is safe.
(Click here to read 'Money market risks')
The truth? Well, yet again, it depends.
If you need a good place for an emergency fund then, yes, it's safe. If you need or might need access to the funds in the short- to medium term then, yes, a money market is a safe place to park it in. However, if you need your funds to grow, then a money market is just about the riskiest place for your cash to be in. In fact, if you need your money to beat inflation over the long-term you ensure your own failure by opting for the 'safety' of the money market.
- You don't need a pension if you own a house.
It may seem like your house is worth a small fortune, but just remember you have to sell it to 'realise' that value. And then what? You still have to live somewhere.
It's impossible to predict what the market will look like when you need to retire and you'll have missed out on a lifetime of tax-breaks that comes with pension contributions.
- Property is a sure-fire investment.
No, it isn't. In fact, a sure-fire investment does not exist.
As with shares you run the risk that your property's value might decrease. Property tends to increase above the inflation rate over longer terms, but this is by no means guaranteed. As with any other investment, the value of your house might fall or not keep up with inflation over the years.
A transfer, divorce or death might force you to sell in a buyers' market and if the market is looking up you'll also have to pay a bundle for the next house you buy.
There are many benefits to owning property, but a sure thing it won't ever be.
- You should do everything in your power to get on the property ladder now that prices are (probably) as low as they'll go.
No matter what the state of the market, it's never a good idea to buy property if you can only just afford to or if you're even a bit unsure about your financial future.
The economy is recovering, but it could be sluggish for years to come. You might have a job now, but how secure is it? Interest rates are low, but what went down must go up again and who knows what shocks might lie ahead of us? Remember, shit happens. Getting on that ladder entails a massive responsibility.
In a shaky economy a bit of flexibility is priceless and being bogged down can cause a lot of stress.
You should not do everything in your power to buy property if you cannot comfortably afford to.
- I'm not rich enough to invest in the stock market.
You need as little as R300 per month to invest in an index tracker like Satrix (click here to learn more about Satrix). In other words, just about anyone with a job has enough money to start investing.
- Actively-managed funds always outperform the market in the long term.
Sorry, they don't. Not by a long shot.
Countless studies have proven time and again that very few actively-managed funds consistently beat their benchmarks.
When the value of shares plummets a tracker fund (which passively tracks the market) gets dragged down with them while, theoretically, an asset manager can pick and choose and thereby buck the trend. In practice, however, this rarely happens.
Warren Buffet, the world's richest and most famous investor, is on record saying that index trackers (like Satrix) will beat most actively-managed funds in the long run.
Actively-managed funds are generally expensive while index trackers are relatively cheap.
Some actively-managed funds sometimes outperform the market, but they're few and far between.
- You can time the market.
Timing the market is the attempt to buy just before prices rise and then to sell before they fall. Timing the market is extremely difficult. In fact, it's so hard that most investment professionals get it wrong time after time. Yet, many small investors believe they can do it, costing them dearly.
Various studies prove that, for most small investors, the longer you're invested the more unlikely it becomes that you'll lose money.
According to PPS Investments, if you bought shares in 1996 and held them through the good and bad times your returns would have been about 14 percent per year. Had you missed only four of the best days each year your return would be less than zero! It's clear that the consequence of even the smallest mistake when trying to time the market is dramatic.
Everyone that tries to time the market will miss a couple of the best days as these often follow the worst ones during tough times.
For everyone except the most exceptional investment professionals the smartest approach is to invest consistently regardless of what the market does.
By utilising a strategy such as Rand Cost Averaging (I suggest you click here to learn more about this amazing concept) you can insure you automatically buy more when prices are low and less when they are high.
Now is always the best time to invest.
- The stock market is plummeting! I must sell and get out.
Sell high, buy low; ever heard that one? Selling when the market is down turns a "paper loss" into an actual one.
If you're making investments for the long-term (longer than, at least, five years) you should not get spooked by market volatility. If you have a well-diversified portfolio, you'll do well to stay the course; only change your strategy if your own circumstances or goals change.
While the stock market is very volatile over the short- to medium-term, its trajectory over the long-term has always been up. In fact, the stock market has never lost value over any ten year period in its entire history. Ever! Over longer terms there is no risk whatsoever that a well-diversified portfolio of stocks will lose any value. It is, obviously, possible to suffer short term losses but for those in it for the long run these losses are completely irrelevant.
Over the long-term no other asset class has ever performed better than stocks and those who ride out the bear markets are always rewarded for being patient and staying cool under pressure.
It's normal to panic, but if you act on that fear, by selling shares you bought as long-term investments, you will damage your wealth in a way that no market crash, no matter how prolonged or severe, can ever do.
Stock market lows are a great time to invest even more. Believe it or not, a great way to get rich is to do exactly the opposite of what this myth proclaims.
- Investing in the stock market is like gambling.
I've heard this excuse for not investing so many times, but it's utter nonsense.
When you buy a share you literally buy a piece of a company. You therefore actually co-own part of the company's assets and will share in a fraction of the profits.
The short-term price movement of shares appears random, but over the long-term a company's shares will revert back to their fair value considering current and expected future profits.
An investor doesn't randomly chuck their money into any old investment. There might be some risk involved, but you're not simply hoping that luck is on your side.
Gambling, unlike investing, is a zero-sum game whereby money is taken from the loser (without giving anything in return) and given to the winner and, unlike investing, no value is created.
- You should always pay off debt with the highest interest rates first.
Paying off debts with the highest interest rates first is, obviously, the cheapest way of doing it, but that is not to say you should always go this route. It may be more inspiring to first tackle smaller balances than trying to chip away at discouragingly large debts.
Click here for a more thorough explanation of what I mean.
- You'll start saving when you earn a bit more.
If you're not frugal while earning a paltry salary you probably won't be once you earn more.
Just about anyone with a job can save something. It's just a matter of spending less than you make. The problem is that most people increase their consumption along with their income.
Saving is not dependent on income. In South Africa many of the poorest households manage to save while a lot of high-income, Merc-driving individuals are drowning in debt.
Don't wait until you earn more before you start saving. Draw up a budget (click here to learn how), cut unnecessary spending and start saving something now!
- Buying at sales saves you money.
This is only true if you really need what you bought. Buying something you don't need, even at a 90 percent discount, can never save you money.
- Consolidating all your debt into your mortgage saves you money and can solve your debt problems.
Yes, it will bring your monthly payments down and, yes, you'll only have to deal with one creditor. It won't, however, save you money or solve your debt problems.
The interest rate charged on a home loan is lower than on other debts, but as the loan is paid over a very long term you'll end up paying way more in the end.
By consolidating your debts into one loan you won't be able to prioritise your debts. Worse than that, while your previous debts would probably have been unsecured, your consolidated one will have your house as security, meaning an increased risk of losing your most valuable asset.
- I'm young and healthy. I don't need life insurance.
You may be young and you may be healthy, but you can still die.
If you have financial dependents, you need life insurance. And if you're young and healthy it'll be dirt cheap.
- Life insurance is more essential than cover for illness.
No, it is not. Why? Because, you are unlikely to die young.
The majority of people that are seriously injured in road accidents survive. According to statistics from the US, the frequency of death from the four leading causes has decreased, while the frequency of disability has increased since the 1960s. You are actually five times more likely to suffer a debilitating sickness than you are to die before age 65. Cancer is not a death sentence and more heart attacks victims survive than ever before.
The majority of those with multiple sclerosis contracted it between the ages of 20 and 40, while half of all testicular cancer cases show up in men under 35 years old.
Many people avoid disability cover because they say it is too expensive. Annual premiums can be one to three percent of your annual salary. And that's why many people opt out.
But consider this: if it is expensive compared to life insurance then it stands to reason that the likelihood of you getting injured is much higher than dying.
- There are certain things I simply can't live without.
If you're referring to food, water, shelter, schooling, etc. then I agree. Everything else, however, you can live without.
Don't convince yourself you can't live without gym, ADSL, a new jersey or whatever. If you're struggling, or not saving enough for the future, don't go into debt for stuff you can live without.
- If I don't buy it on credit, I'll never be able to afford it.
If you want something you can't afford, first save then buy it. To some this seems like a radical concept, but it's really the way it should be.
- I'm still young; I don't need to start planning for retirement yet.
Once it dawns on you what a powerful force compound interest is (click here to learn more about compound interest) you'll realise what a nonsensical belief this one is.
Someone who invests R200 a month from age 20 to 29 and then lets their investments grow is likely to have more money at 60 than someone who invests R200 a month from age 30 to 59.
The best time to start saving for retirement is yesterday and the earlier you start the richer you'll be (click here to read 'The wisdom of starting early').
- I'm too old and it's too late to start saving now.
It's true that your investments won't grow as much as the 25-year-old's, but that's no reason to just give up. Every rand you invest brings you closer to financial freedom. Remember, you don't need your whole pension when you retire and you can still save and invest throughout your life.
Most waste a fifth of their income without realising it. Plug the hole; give yourself a raise.
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