Debunking Financial Myths

There are so many financial myths that do more harm than good. The truth is that finance is actually pretty simple, when you are armed with a little know-how. In this article, I am going to outline six dangerous myths that I see perpetrated on social media and the news.

1.  If you just figured out how to cut your expenses, you would be able to save more, and you could be a millionaire and retire! You can cut your costs only so much before you start actually living in poverty. While keeping an eye on your expenses is important, growing your income and doing the right long-term planning and investment management are often better areas to focus on. (This tidbit of mine got picked up by Reader’s Digest, see it here.)

2.  Buy and hold - just buy a low-cost ETF and hold it. “Buying and Holding” is not always the best approach. Stocks rise and fall—and the drops can be upwards of 50% during bear markets. It is important that you have a risk management strategy that allows you to protect the roof over your head, the food on your table and the ability to continue your lifestyle – regardless of market swings.

3.  Bonds are safe. Bonds are often seen as less risky than stocks. While they usually fluctuate to a smaller degree than stocks, there’s a stealthy risk that is harder to see. When inflation is above the rate of return on bonds, then your purchasing power drops over time. Moreover, when interest rates rise, bond prices fall. Bonds are certainly not safe in certain market environments. It takes a well thought out financial plan to ensure your risks are effectively managed.

4.  “The 4% Rule” - withdrawing 4% a year from your portfolio, is a safe amount. It used to be that a couple could confidently take out 4% of their portfolio each year without worrying about running out of money. Today, with bond rates so low and stock prices relatively elevated, future returns appear to be less than desirable; 4% might be too aggressive. Retirees and pre-retirees must consider the reality that traditional stock and bond investments will not deliver the returns of yesteryear. Additionally, using an unchanging strategy is a recipe for failure. Think about disruptions like Amazon, Uber, and Robinhood that have forever changed their respective industries. Your income strategy in retirement needs to keep pace with changing conditions or you will quickly find yourself tossing and turning in bed, anxious over your dwindling savings.

5.  Inflation averages 3% per year. While inflation has historically averaged roughly 3% per year, that number can vary wildly. Think back to the 1970s and early 1980s when inflation ran above 5% for years on end. Even in 2021, consumer prices rose at their fastest clip in 40 years. Those nearing retirement cannot count on a steady and low inflation rate. It is critically important that your retirement strategy account for actual increases in prices you will be feeling, rather than some mathematical model generated by people who have never gone hungry a day in their life.

6.  My taxes will be the same in retirement. Income tax rates are about the lowest they have been in modern history, as of this writing. Will that continue? Hard to say, but they probably won’t go any lower. Retirees must be mindful of the real possibility that tax rates will increase in the decades ahead.

It can feel impossible to cut through the noise in today’s non-stop financial media. The truth is, with a little bit of knowledge, a plan, and the right community, you can build the life of your dreams, with confidence and peace of mind.

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