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| Tune out someone who tells you it's impossible to time the market or that you must attend college to make decent money. (GETTY IMAGES) |
Not all money advice is helpful. Some so-called tips could even set you up for financial failure. U.S. News spoke to five finance experts and asked them which money tips they think people are better off ignoring. Here's what they said.
You should always go for the highest return. Of course you want to make the most money possible off your investments, but going for the highest return isn't always a smart strategy. "It may not necessarily suit your goals," says Michelle Hutchison, money expert for personal finance site Finder.com. The risk on these investments may be too high, or they could come with significant fees.
A home is always a good investment. Several experts pointed to the notion that buying is better than renting as a bit of money wisdom everyone should ignore. "People think 'if I rent, I'm a loser,'" says David Schneider, a certified financial planner at Schneider Wealth Strategies in New York City. On the contrary, renting can save money in the long run, says Pete Lang, an investment advisor and founder of Lang Capital in Hilton Head, South Carolina. Homes come with steep transaction costs and maintenance expenses. Plus, there is no guarantee they will appreciate in value.
Don't ever go into debt. Conventional wisdom says debt is always bad, but it can be useful for some money management strategies. "Some people don't want any debt, and there are others who are totally comfortable leveraging debt," says Margaret Paddock, Twin Cities market leader of The Private Client Reserve of U.S. Bank. The key is to not overextend your obligations and understand your personality and commitment when it comes to paying back debts in a timely manner.
Pay off your debt before savings. Along the same lines, some people advise only saving money once your debt is paid off, but you may want to ignore that. "You can do both," says Kimberly Foss, a certified financial planner and founder of Empyrion Wealth Management in New York. "Some of the debt you have may be cheaper than what your investments could earn."
Don't go into retirement with a mortgage. Being mortgage-free in retirement can be a good thing, but retirees shouldn't liquidate assets to do so. By dipping into retirement funds early, people could find themselves subject to steep tax penalties. Or they could end up prematurely depleting their cash reserves and making it hard to sustain their desired lifestyle in retirement.
College is a must if you want to make good money. It's true many employers nowadays require a college degree, but there are also plenty of well-paying job opportunities for those with technical training. Hutchison says one of the biggest money mistakes she sees people making is going to college, racking up student loans and then dropping out. "Don't go to college if you don't have your heart in the course," she says.
Only invest in stocks that provide dividends. "People are obsessed with dividends, but there's nothing magic about them," Schneider says. Dividends are deducted from a company's earnings, which could reduce the value of shares. In other words, dividends don't come without trade-offs. Schneider says investors could be missing out on some worthwhile stocks by focusing only on those offering dividends.
Use your age to balance your portfolio. A common rule of thumb is to subtract your age from 100 and use the resulting number as the percentage of your investments to put into stocks. The rest should go into cash or bond funds. That advice may have been good at one time, but with today's extended lifespans, it's too conservative, Schneider says. Putting half of your money in bonds at age 50 could be a good way to run out of cash in retirement.
Buy bonds to generate income. Speaking of bonds, Schneider says it's a myth that bonds are good for income. "Actually, they are a buffer for risk – a risk reducer," he says. Some money should be invested in bonds to keep funds safe in the event of a market downturn, but don't expect to make much income off them.
You can't time the market. The prevailing wisdom for stock investments is to buy and hold for the long run because there is no way to time the market and avoid downturns. Lang says buying and holding is an important component of long-term investments, but a certain level of timing is possible for short-term investments. "Without a doubt, there are numerous managers who have erected [investing] strategies that rely on some sort of timing," he says.
You only need a handful of stocks to be diversified. If you're buying individual stocks, more is better, according to financial experts. "A relatively small percentage of the stocks in any market make the most gains," Schneider says. Investors need to own a large number of stocks to make sure at least some of those winners are in their portfolios. Another option is to buy mutual funds, which contain multiple stocks, rather than putting your money in individual companies.
The stock market is too risky. After the latest recession, some people have decided that opting out of the stock market is best. While it's true that stocks come with risk, skipping these investments could make it hard to have adequate money in retirement. "Even my 90-year old clients have 10 percent of their portfolio in stocks," Foss says.
Always sell when a stock goes high. The old adage is buy low and sell high, but Schneider says you shouldn't be too quick to sell your best-performing stocks. "If you sell all your winners for a fast gain, then you're left with all your losers," he says.
Stop investing when the market is down. The uncertainty of a down market leads many people keep money in their pocket rather than investing. However, Lang says, "When there's blood in the street, that's a good time to invest."
You don't need a pro to help you pick stocks. We live in a do-it-yourself society, and people may be tempted to think they can pick a stock portfolio on their own, especially given the wide range of information available today on stock prices and trends. However, even the most thorough individual investor may not be able to match the breadth and depth of knowledge an investment pro possesses. "The greatest likelihood is [a DIY investor] is going to have an under-diversified portfolio," Schneider says.
However, not all finance professionals are created equal, and some of them may give bad money advice as well. "If you're working with someone and you get that gut feeling and aren't comfortable, ignore that advice," Paddock says.
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