Financial Advice to Ignore - Even If You Get It From Your Mother!
1. Buy Low, Sell High. This advice has endured through the ages, most likely because it is so simple. The problem is in practice – if it were simple to know when is low for a particular security, and when is high, then of course everyone would follow this maxim. Unfortunately, fortunes are lost every day by folks attempting to Buy Low, Sell High.
Diversification – in time, asset classes, styles, tax treatment – coupled with cost reduction – is a much better way to go. If we must put a short, snappy phrase in play, perhaps it should be “buy a little at a time, all the time, until you need the money – and then sell only as much as you need, when you need it”. Doesn’t really fall off the tongue quite as easily, but you’ll find that the results are much more predictable, in your favor.
2. Hot Stock Tip! This one comes in many forms, including “Mutual Funds to Buy Now!”, and “My Broker Called Me About This Hot Opportunity!”. These are the kinds of “advice” that make good headlines, the kind that sell magazines, newspapers, and books.
You may receive this one in an unsolicited email, from a co-worker, in a financial magazine, via fax, or over the phone. These “opportunities” can range from former “winning” investments to the stock that the brokerage is paying the highest commission on at the moment.
Steadily gaining ground in your investment accounts by following a solid, well-diversified investing plan which is rooted in your goal plans isn’t sexy. But oftentimes the things that work best are pretty boring. It’s much better to be boring than wiped out by a wild ride on a questionable investment.
3. This is a Great Company! You Should Invest In It! Great companies don't necessarily make great stocks. It seems simple: If you invest in only the best companies out there, your returns should be stellar as well. But great companies can falter, and if you pay too much for the stock, your returns may be less than great.
In the long run, you are probably much better off leaving stock picking to the pros – the managers of mutual funds – and investing in a broadly-diversified array of companies by using low-cost mutual funds.
4. Free Financial Plans. The advice may be free, but you will likely find it to be centered around the provider’s products. It just doesn’t make sense for a company to provide something of value for free, unless it is being provided in order to entice sales of their product.
Secondly, above and beyond the obvious conflict of interest issue, when financial advice or planning is free, chances are it is a “cookie-cutter” plan. I don’t know about you, but I’m pretty certain that my financial circumstances are unique – or at least I’d like to be treated as such.
5. Refinance Your Debt With a Home Equity Loan! Purveyors of this advice are not necessarily recommending anything bad – it’s just that human nature has a tendency to throw a wrench in the works. As with most of this list, there is a grain of truth to it, and a bit of value can be gleaned from it. The problem is in how the activity is approached.
In order to be successful at debt reduction, you need to understand how you got there in the first place. Perhaps it was college loans, or a health-related situation. Or maybe it was one (or several) too many pairs of “perfect pumps”. If you’re determined to stop the debt spiral, you need to take the first step of keeping the balances from climbing. In the case of a health-related issue, this may not be possible – but in most other situations, you can make strategic decisions to “stop the bleeding”. This may require taking some time off from school to work and cut down on some of your debt, or possibly cutting up all of those cards and avoiding the mall or online store, as the case may be.
As in all financial planning endeavors, the first step is to organize, to get a picture of exactly what you have (or what you owe, in this case). Tally up the balances. Look at that big number, and prepare to reduce it. Once you’ve determined just how big the balance is, take a look at the payments in total. Is your current rate of payoff making a dent? What are the rates of interest that you are incurring on the balances?
Having reviewed these numbers, you need to consider your resources. Do you have equity in your home that could be used to work yourself out of this situation? Caution is necessary here, because it is very easy (ask about half of the credit-card-holding population) to pay off your cards with an equity loan, only to charge up the balances soon afterward. It only takes one or two cycles of this to get yourself into a hole that is nearly insurmountable. This is why you must always consider “how you got there”, and use that information as a motivator to change those habits that caused the problem. Then (and only then) should you consider using your home equity to reduce the cost of the debt load, and therefore begin reducing the load itself.
