False financial beliefs that could be hurting your bottom line
If you’re a daily reader of the financial pages, or you tune into financial programs or podcasts on a somewhat regular basis, you’ve probably come across your fair share of financial advice and investment tips over the years. Some of that advice you probably accept. Some you disagree with. And other advice, you don’t have much opinion about at all.
But no matter what you think of it, there’s likely been a significant chunk of advice that you’ve heard repeated and re-repeated so often, by so many people over the years that it has become something closer to universally accepted truth – regardless of whether it’s true or not.
In actual fact, many of the so-called “truths” of personal finance can more accurately be labelled myths: false beliefs, half-truths and misguided assumptions that can derail your finances and make your portfolio vulnerable to market downturns and unforeseen crises. There are a few reasons for this: it could be that the financial environment or “rules of the game” which led to these truisms is fundamentally different now. Or maybe they were initially based on incomplete information. Or, perhaps, on faulty assumptions or misunderstandings of how financial markets really work. Or on anecdotal evidence that just isn’t borne out by historical data.
With that in mind, here are several money myths which we need to consign to the dustbin of financial history. By forgetting about these oft-believed misunderstandings, you’ll be better positioned to manage your money wisely and keep your finances strong throughout your golden years.
MYTH 1: “I don’t get investing. I guess I’m just not smart enough …”
A myth that prevents many people from ever starting their wealth-building journey. Many people are intimidated by often-confusing, overly technical financial language and statistics, so they delay opening an investment account, put off investment decisions and avoid engaging in the topics of finance and investing altogether.
Here’s the truth: the most successful investors in the world are not necessarily the smartest people in the room. They are, rather, the most disciplined: they don’t allow their emotions to distort their investment decisions. And the most open: they seek out differing opinions and they don’t get “locked in” to a particular idea or way of thinking. Perhaps counterintuitively, they also tend to be the most humble: they’re quick to acknowledge the limits of their understanding and they admit when they got something wrong.
No doubt that financial knowledge is a very powerful thing, and you should try to further yours whenever possible. But you don’t need PhD-level financial knowledge or special intelligence to cultivate a powerful money mindset. What you need is discipline, an open mind and just a bit of humility – qualities available to anyone.
MYTH 2: “Debt should always be avoided.”
A myth that many people come by honestly, in that they’ve seen the financial hardship and sleepless nights which debt can create. Seeing how difficult it is to manage debt can lead them to thinking in absolutes: debt is a financial vulnerability, a severe stress or an economic evil of the highest order.
But the idea that debt is some kind of financial bogeyman – that’s a myth. Most of us are wise enough to understand how the high-interest debt charged by credit card companies can be financially ruinous. But we can also understand that the lower-interest mortgage which we signed to buy our homes allowed us to build a good deal of wealth.
The key to using debt properly is to think about it in much the same way as you think about fire: as an incredibly useful tool, as long as we’re cautious about where, when and how we use it. Those who use debt strategically to acquire appreciating or income-producing assets – for a down payment on a rental property, for example, or as startup financing for a promising business idea, or even to fund an advanced degree that gives us (or a family member) additional earning power – can harness a powerful, wealth-building strategy that can boost their net worth over time.
MYTH 3: “Your home is your best investment. Renting is just throwing money away.”
A good many of us were brought up to believe that a home is the single most important financial asset which we will ever own and should be a foundational-level investment for almost everyone. Such people point to the extraordinary gains enjoyed by homeowners in Vancouver (average home up by 192% over the past 20 years), Toronto (up by 180%) and other international cities as proof that owning a home is the best and easiest way to riches.
Not so fast. No question, owning real estate can be a great “forced investment plan” for many people (after all, if you don’t pay your mortgage, the bank will take your home away). But this doesn’t mean that every home in every city at every time is a good investment. That’s particularly true for snowbirds looking to purchase a rental property or a vacation home. The actual fact is that residential real estate in most parts of Canada has historically provided only modest financial returns once property taxes, repairs and other costs are factored in.
If you’re thinking about buying a home (or buying a second one), don’t assume that ownership is always the best way to build wealth. Check out an online calculator (there are many out there) and compare the gains on real estate in the area you’re looking at to what you’d gain by renting and investing the difference. You might be surprised at how “throwing money away” actually leaves you with more money over the long run.
MYTH 4: “I don’t invest in stocks. The stock market is just a giant casino.”
Some people are uncomfortable with how much the stock market goes up and down on a near-daily basis, often for no real rational reason at all. This volatility encourages them to save their money rather than invest it; they sock it away in savings accounts, keep RRIFs and TFSAs in cash and fill their portfolios with guaranteed income certificates (GICs) that pay low interest rates.
At the heart of this discomfort is a fundamental misunderstanding of what stocks really are. They are not casino chips – rather, they are small, fractional slices of a business. While their price movements may seem irrational, capricious and emotionally driven in the short term, over the longer term, their value is utterly rational, moving up and down in pace with the success (or lack thereof) of the underlying business.
Knowing this fundamental truth is the key to long-term wealth building. When you see buying stocks as buying an ownership stake in a business, it’s possible to apply a level of logic and discipline to investing: you can research a company’s profit and loss statement, you can examine its future prospects, you can think carefully about how it can take a given innovation or trend or scientific advancement and turn it into a profitable enterprise. Yes, there will always be uncertainties, incomplete information and assumptions which you make along the way. But that’s a world apart from going “all in” on a poker hand.
MYTH 5: “The situation with [insert current crisis here] makes it waayyy too risky to invest right now.”
A myth that’s sure to be trotted out whenever a significant economic event or geopolitical change occurs, whether that’s rising inflation, a sputtering economy, a change in U.S. trade policy, how AI will put our grandchildren out of work, or whatever the financial news seems to be focused on.
Don’t get us wrong: inflation, the economy, AI, or even the price of tea in China are worth learning about. And sometimes, these things can have a strong and powerful effect (either positive or negative) on our portfolios. But understand this: in the decades you’ve been upon this earth, the world’s stock markets have overcome many challenges both similar to, and very different from those we face today. And despite sometimes painful downturns, they continue to grow and make money for investors.
Instead of pulling your money out of the market in reaction to either economic or political events, build a broadly diversified, defensively oriented portfolio of blue-chip stocks which you know and understand – or outsource the work by investing with experienced fund managers. By all means, pay attention to what’s going on economically. But unless you need to access your savings right now, it’s almost always better to make measured changes to your portfolio rather than a wholescale “sell it all” approach. Because this too – whatever “this” happens to be at the moment – shall pass.
MYTH 6: “Bonds are a simple, safe and risk-free way to generate income.”
Not exactly. Sure, buying a broadly diversified bond fund or ETF can be a relatively easy way to generate interest income during retirement. And yes, in general, bonds tend to be less volatile than most stocks. But they are by no means a risk-free financial panacea.
While the interest payments that bonds generate (a bond’s “coupon”) usually stay the same throughout the term of the bond, the bond’s underlying value can go up and down in response to changes in interest rates. When rates rise, the value of an existing bond that was issued with a previous, lower interest rate often decreases. In a time of rapidly rising rates (such as we experienced a year or two ago), that can lead to a dramatic drop in the value of a bond portfolio.
And if you’re an investor who’s attracted to corporate bonds because of their higher yields, understand that these bonds can be quite sensitive to the ebb and flow of the business cycle. That makes them much more likely to move up or down according to shifting economic sentiment, the risk of recession and investor behaviour. Such moves can be quite a surprise for retirees who are looking for a “simple, safe and risk-free” source of income.
MYTH 7: “Emergency fund? We don’t need that – we have a line of credit.”
A very common myth. Absolutely, a line of credit (typically secured against the equity built up in your home) can be an affordable, convenient source of funds for large purchases – a renovation, or perhaps the purchase of a touring RV, or maybe even a vacation property. But by no means is a line of credit the same thing as cash in the bank which you can access at any time.
Keep in mind that many lines of credit are structured as demand loans: the issuer has the legal right to demand repayment at any time, even if you’ve never missed a payment. Under normal circumstances, the chances of that are pretty low. But it can happen: if your home drops in value, for example, the bank could reduce your loan limit and force you to pay any amount over the now-lower limit. Or, if a bank needs more liquidity, it could reign in or even eliminate lines of credit altogether in an effort to reduce risk – something that actually happened to some customers during the 2008 financial crisis.
Sure, a line of credit might be a viable solution to get you out of a financial pickle. But a better approach is to think about the ill-timed, yet inevitable financial challenges which we all face: the car needs a new transmission; you need an MRI right now; there’s a leak in the roof; whatever. Instead of scrambling to find the money when these things happen, build up a fund for such “predictable emergencies” over time.
MYTH 8: “Why do I need an estate plan? I already wrote my will.”
Writing a will is a critical step in all estate planning. But it is rarely a “set it and forget it” type of task. The fact is that an out-of-date will can sometimes be just as ruinous to your finances – and just as damaging to your family – as no will at all.
As your financial situation changes – you buy or sell a home, for example, or perhaps a family business – you’ll need to review your bequests to ensure that they reflect your current assets. Same goes for your family situation – new relationships, new grandchildren and new living arrangements all demand a review to ensure that your money goes to the right people. Changes with your executor might be another reason for an amendment; if your current executor becomes ill, passes away or moves to a different part of the country, it might be a good idea to reconsider your choice.
Such changes don’t happen all that often. But they do occur often enough that you should get into the habit of looking over your will every couple of years. By doing so, you’ll be in a better position to ensure that you don’t leave behind a legacy of family conflict and legal hassles.
MYTH 9: “I’m too smart to fall for financial fraud.”
A very dangerous myth. Sure, most of us are smart enough to figure out that the Nigerian prince who needs a bit of help to unlock millions from his trust fund isn’t who he says he is. But fraudsters are becoming increasingly sophisticated in their efforts to separate us from our hard-earned money. Their use of fake websites, duped call ID numbers and AI-generated documents has become so good that even the smartest, most financially savvy individuals can have the wool pulled over their eyes.
Don’t be complacent about these things: avoid lazy, easily guessed passwords such as “password” or “123456.” Keep the operating system on your phone updated. Set up your two-factor authentications. Don’t use your banking apps in public wi-fi zones. And be very, very cautious about giving your financial info over the phone or email – even if someone says that they’re from your bank, or CRA, or your family.
More generally, be ever-vigilant and on the lookout for the telltale signs of investment fraud: (a) the promise of super-high returns; (b) the “guarantee” of no risk; and (c) the need to act now. Above all else, remember what your grandma told you: if it looks too good to be true, it almost certainly is. Ultimately, that will be a much stronger protection than simply repeating “it can’t happen to me.”
MYTH 10: “I stick to Canadian investments – it’s just safer.”
Judging by the data, one of the most common money myths of all. The average Canadian investor allocates more than 50% of their portfolio to Canadian stocks – this, despite the fact that the Canadian stock market represents only 3% of the world’s total stock market capitalization. In financial circles, this is called home bias: a predilection to over-allocate funds to domestic investments, whether out of familiarity, transaction costs or a misperception that such investments are “safer” than those from other countries (or all three).
If you’re a regular reader of this column, you’ve likely read quite a bit about the benefits of international diversification: simply put, it’s one of the easiest, most effective ways to protect your overall portfolio against many types of market and business risks. That’s particularly true in a time when long-established trade policies and political alliances seem to be changing rapidly (and not always logically).
No, this doesn’t mean that your portfolio should always be aligned with the worldwide market capitalization. But putting all of your eggs in one basket (however patriotic that may be) might not be the wisest idea. Think about it the next time you look at your portfolio holdings: if you find yourself overloaded on Canadian stocks and bonds, now might be a very good time to send some of your money abroad.
MYTH 11: “My brother-in-law told me about this one … it’s a no-brainer!!!”
A myth that has the potential to destroy more wealth than any other on this list – even more so at a time when so many investors are piling on to meme stocks, cryptocurrencies and anything even remotely connected with AI. It seems as if many investors believe that the way to wealth is by following hot stocks, putting money into hyped-up ideas and getting in on the “next big thing” before the rest of the investment world catches on.
No doubt some people will make big money doing just that. But markets are dynamic, and prices move quickly and unpredictably – that goes double for stocks which exist in a bubble of excitement and get-rich-quick energy. And anyone who puts their money into a “sure thing,” a “no-brainer” or a “can’t lose” type of investment without taking a reasoned, rational look at a company’s current financials and future prospects is a gambler, not an investor.
Remember, the goal of investing isn’t necessarily to make the most money possible. Rather, it’s to make the most money possible while taking on the least amount of risk. It’s that last part that gets overlooked when the market is making all-time highs. Instead of betting big on what’s hot, focus on building a portfolio of well-established companies with proven track records and reliable dividend payouts. No, you won’t be able to brag so much to your brother-in-law about how you made easy money. But as a strategy for becoming wealthy, it’s a lot more reliable.
MYTH 12: “I got this …”
Maybe you’re an expert-level sophisticated investor. Or a veteran businessperson. A skilled accountant or tax lawyer. Or maybe you really enjoy digging into annual reports, reading 10-K forms and tuning in to stock analyst programs and podcasts. If you’re any of those things, then yes, you probably have the skill, the knowledge and the aptitude needed to handle your portfolio and personal finances on your own.
If you’re more of a passive or part-time investor – someone who’d rather spend your time travelling, working on your golf game, being with family or doing any number of other things than ruminating over your latest portfolio statement – then seeking out some professional advice might be one of the simplest things that you can do to build wealth.
Whether you live on a modest pension or your net worth is seven figures or more, the clarity, discipline and strategic thinking that a professional financial planner or wealth advisor can bring to your finances is often well worth the fees which they charge. To say nothing of their ability to steer you clear of the myths, misperceptions and wrong-headed thinking that may be costing you a good deal more than you realize – both in money and in stress.