Truisms are stories we tell one another so often that we start to believe they’re true, even though they don’t stand up to even the most elementary testing. By way of example, how many people still believe that you lose most of your body heat through your head? The truth is that your body loses heat through any uncovered skin and, all things being equal, your head only accounts for about 10% of the total heat loss.
Most truisms, the fables we repeat without much thought to their accuracy, are harmless. It doesn’t really hurt your kids to insist they wear hats on a cold day and no one goes broke because they believe cracking their knuckles leads to arthritis. But when those myths and fables turn up in financial advice, that’s when they can cause problems. You have to chart your financial course based on hard, cold facts, not friendly truisms you get from your buddies out on the golf course. When it comes to money, here are four myths that refuse to die.
Your House Is Your Biggest Investment
That lie is repeated mainly by the real estate and banking industries which have a vested interest in you buying more house than you can really afford. The only reason a house is the biggest investment for most people is that most people don’t have any other investments. The truth is a house that you purchase through the retail housing market is a terrible investment and always has been. Houses are not a liquid asset, which means they’re hard to convert to cash and there are huge transaction costs in any transfer. When you account for all the costs associated with owning a home, the value barely keeps pace with inflation.
The people who get rich off real estate are getting rich because they buy income producing properties, not single family homes. Your house is four walls and a roof to keep your stuff dry, anything beyond that is vanity and a money pit.
Retirees Shouldn’t Have Money In The Stock Market
Tell that to my dad who makes more from investment income than all but the top 5% of wage earners. You should take out what you need to live on and what the IRS says you have to take out to avoid paying additional taxes; other than that it doesn’t hurt to stay invested in the market. Your investment mix between stocks, bonds and hard assets should be fixed percentages based on your age and tolerance for risk. If your fixed percentage in stocks is under 20%, you may be losing money to inflation.
You Should Eliminate All Debt Before Retirement
Why wait until retirement? We’ve previously discussed the myth of “good debt” most of which is PR hogwash paid for by big banks. The entire concept of the debt economy will go down as one of the greatest shams in financial history. Debt service is like a stealth tax on every financial transaction and millions of people pay that tax every day without a second thought.
Invest In What You Know
What if what you know doesn’t make that much money? A good investment portfolio is balanced across a number of sectors that perform well over time. Health care funds are hot right now but what happens in 20 years once the Baby Boomer generation starts dying off? Being overweight in health care might pay off now but if that investment path becomes a habit you may miss good years in other industries or lose money when the fortunes change for a particular investment sector.
Investing for retirement is not rocket science and you don’t really need all that much help to invest in market index funds and figure out the right mix for stocks and bonds based on your age and tolerance for risk. For most people just avoiding the common mistakes will put them far ahead of where they are today.