Throughout the ages, financial folklore has been handed down from one generation to the next as so-called wisdom. And our generation has been brainwashed with its fair share of folklore. Let’s consider some examples.
1) Buying a home is the best investment anyone can make.
The pummeled housing market should have put this particular fairy tale to rest, but there are a few holdouts that haven’t gotten the message. People, for example, that bought their home decades ago are often cited as proof that buying a home is still the “best investment anywhere.”
But before we count their profits, don’t forget to deduct their insurance premiums, the cost of home maintenance, improvements and property taxes. Including these real-life expenses into the equations portrays a far more realistic picture about the true investment value of home ownership. It’s not as good of a deal as you’ve been sold.
2) Max out your 401(k) plan.
Overstuffing your 401(k) plan with lots of money – is a good savings habits – but won’t necessarily help your investments be more profitable. What about the wonderful benefits of tax free growth and employer matches?
Unfortunately, these 401(k) features are undermined by poor asset allocation decisions by plan members and compounding fees.
3) Only invest in funds with managers that have a good track record.
There are countless examples of how this piece of advice has been proven false more times than true. Since we don’t have unlimited time or space, let’s consider just one recent example – Philip Jabre.
Jabre is one of Europe’s best known hedge fund managers and after posting a tranquil 3% gain during 2008’s financial crisis, he followed it up with a handsome 46% gain in 2009. Surely, investing money with Jabre - a seasoned professional with an impressive track record - was the smart thing to do, right? In March,
Jabre bought Japanese stocks (NYSEArca: EWJ) on news of the earthquake but got clobbered when the Nikkei Stock Average tumbled. Instead of staying calm, Jabre panicked and sold his shares before Japanese stocks bounced back, which netted his firm $300 million in losses. Hardly anyone could’ve foreseen this sort of meltdown from a guy with an amazing track record!
So much for the false theory that hitching your wagon to financial folklore brings you -- and your clients -- closer to financial independence.