5 Pieces of Bad Financial Advice People Keep Spreading
We get all kinds of advice about money from the people around us. Even though they may be our very trusted sources – like our mothers, those suggestions are not always good. Here are five commonly shared tips you should not follow.
In the interest of full disclosure, my mother did not give me any of this advice. She tended to stay with the “wait an hour after eating to go swimming” kind. Thanks, Mom!
1. “Buy low, sell high.” This advice has endured through the ages, most likely because it is so simple. The problem is in practice – knowing when a stock is appropriately low and when is appropriately high is impossible.
If there were some simple ways to know when a stock is low or high, then of course everyone would follow this maxim. Unfortunately, there isn’t. Fortunes are lost every day by folks attempting to find buy-low-sell-high opportunities.
Cost reduction and diversification – in time, asset classes, styles and tax treatment – are much better ways to go. If we must put a short, snappy phrase to describe this strategy, perhaps it should be “buy a little at a time, all the time, until you need the money – and then sell only as much as you need, when you need it.” Doesn’t really fall off the tongue quite as easily, but you’ll find that the results are much more predictable in your favor.
2. “This stock is really hot.” This one comes in many forms. You may hear it from a co-worker, in a financial magazine, via fax or over the phone. You may receive an email titled “Top 10 Mutual Funds to Buy Now!” or “My Broker Called Me About This Hot Opportunity!”
Steadily gaining ground in your investment accounts by following a solid, well-diversified investing plan is more likely to be successful. It isn’t sexy. But oftentimes the things that work best are pretty boring. Better to be boring than wiped out by a wild ride on a questionable investment.
3. “This is a great company. You should invest in it.” It seems simple: If you invest in only the best companies out there, your returns should be stellar as well. But great companies don’t necessarily make great investments. They can falter, and if you pay too much for the stock, your returns may be far less than great. In the long run, you are probably much better off leaving the stock picking to the pros – the managers of mutual funds – or using low-cost index mutual funds to invest in a broadly-diversified array of companies.
4. “Use this free financial planning service.” The advice may be free, but it may involve buying some purveyor’s products. It just doesn’t make sense for a company to provide something of value for free, unless the service entices sales of their product.
Besides the obvious conflict of interest, when financial advice or planning is free, chances are it is a cookie-cutter plan. I don’t know about you, but I’m pretty certain that my financial circumstances are unique – or at least I’d like to be treated as such.
5. “Refinance your debt with a home equity loan.” Pushers of this advice are not necessarily recommending anything bad. There is a grain of truth to it. Refinancing a loan may save you money, if you get a lower interest rate. The problem is that this advice doesn’t address the underlying causes of your debt.
To be successful at debt reduction, you need to understand how you got there in the first place. Are you in debt from college loans, medical bills or just one (or several) too many pairs of perfect pumps?
If you go on overspending, putting your home up for a loan may leave you in worse shape. It is very easy to pay off your cards with an equity loan, only to charge up the balances soon afterward. This is why you must understand how you got there and change those habits that caused the problem. Only then should you consider using your home equity to reduce the cost of the debt load, and begin reducing it.
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Jim Blankenship, CFP, EA, is an independent, fee-only financial planner at Blankenship Financial Planning in New Berlin, Ill. He is the author of An IRA Owner’s Manual and A Social Security Owner’s Manual. His blog is Getting Your Financial Ducks In A Row, where he writes regularly about taxes, retirement savings and Social Security.
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