Money Myths: Investment Advice Worth Ignoring
Don’t allow yourself to be seduced by the myths and adages propagated in the media and by some financial advisers.
Some of this advice, reasonable as it may sound, can lead into dangerous situations and cost you a lot of money.
1 “Invest for the long term”
That’s fine advice when you’re 20 years old. When you’re 50 or older, the “long term” isn’t all that long any more. The rationale behind this thinking is that historically the stock market rises over time, so any temporary losses will eventually be recouped. That’s true, as we saw after the crashes of 2000 and 2008.
However, there are two problems with this approach. The first is age – the older you are, the less time you have to recover from serious setbacks. The second is psychological. When fear grips the market, many people panic and sell out at a big loss. That leaves them traumatized and reluctant to ever get back into the market again.
2 “Go for the highest return”
With rates so low, many people have abandoned the old safe havens of high interest savings accounts, GICs and bonds in favour of high-yielding common stocks, real estate investment trusts and the like. The extra cash flow they generate is welcome, but there’s a lot more risk involved than you may realize.
Look what happened in the energy sector in recent years. After the price of oil fell through the floor, many companies were forced to slash their dividends and saw their share prices collapse. Baytex Energy, a Calgary-based oil and gas company with assets in both Canada and the U.S., is an example. In mid-2014, the stock was trading at close to $50 and paying a monthly dividend of $0.24 per share ($2.88 annually). At that point, the yield was a very enticing 5.7 per cent.
Then disaster hit. The price of oil plummeted, and Baytex saw its revenue drop 50 per cent. In a desperate attempt to preserve cash, the company slashed its monthly dividend to $0.10 a share. At the time of writing, the stock was trading at around $3, down more than 90 per cent from its 2014 high.
3 “Use other people’s money”
A generation ago, retiring debt-free was one of the primary goals of Canadians. No more. The baby boomers have grown comfortable with debt during this long period of benign rates, and now they’re carrying those habits into retirement.
A survey conducted last summer by credit-rating agency Equifax for HomEquity Bank found that 11.3 million people age 55 and older are carrying debt of some type. That included about 1.9 million who had a mortgage, a 20 per cent increase in two years. The risk is that when interest rates eventually rise (which they will), the cost of servicing those debts will result in a financial crisis for many.
4 “Your money is guaranteed”
The financial industry has been making big profits from “guaranteed” products in recent years. Credit their marketers: they recognized that the credit crash of 2008 left many people traumatized and desperate to find places where their money would be safe.
In some cases, such as Government of Canada bonds, NHA mortgage-backed securities and GICs that are covered by deposit insurance, the guarantees are valid, but the returns are depressingly low. People want higher guaranteed payouts, and the industry has obliged with a range of choices including principal protected notes, market-linked GICs and various life insurance income products.