by You may have heard a variety of investment tips from your neighbors, your friends, or the internet. But which of them are actually true? Here is a breakdown of the worst investment tips, and what you should do instead.
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The Stock Market Is a Casino, so Stay Away
Casinos are designed to take your money. The more you play, the more you are likely to lose. The house always wins in the long run. Check out my article here to find out why that’s the case.
The stock market, however, is NOT a casino. It is designed to increase your wealth.
Based on history, the average S&P 500 annual return is 10-11% from 1926 to 2018 according to Investopedia.
Is it coincidence or luck that causes the stock market to go up?
The answer is neither. The stock market goes up by design.
Companies raise capital to invest in their own businesses. They use the capital to design better factories, hire more employees, cut costs, and increase their bottom line. They repeatedly create something for $50 and sell it for $100. Guess where the profits go? The profits go to shareholders.
Sure, stocks can go down from one month to the next. But over the long run, they have been a tremendous investment.
Another reason why stocks go up? The Federal Reserve (The Fed) hates to see the stock market fail.
When stocks go down, the federal reserve dumps a ton of cash (liquidity) into the economy through quantitative easing or stimulus payments. It happened during the 2009 recession and 2020 coronavirus pandemic.
With more money in the economy, people spend more money, companies make more money, and shareholders make more money.
The Fed ensures that the stock market is too big to fail. Keep your money invested in the stock market.
There’s no Good Reason at all to have a Credit Card
Popular “guru” Dave Ramsey famously said “There’s no good reason at all to have a credit card”.
That is absolutely bogus.
If you can use a credit card responsibly and pay off the balance every month, a credit card provides many benefits including:
- Increase your credit score
- Gain credit card rewards points
- Increased security over carrying cash
- Convenience
Of course if you max out your credit card on frivolous things and never pay off your balance, you will run into a lot of trouble. But that is not the credit card’s fault.
If you drive your Honda 150 mph over a cliff, don’t blame the car. That’s not what it was designed to do. The problem in that case is user error.
Drive your Honda responsibly and you’ll go places.
Use credit cards wisely and you’ll be better off.
Pay Off Your Mortgage Early
Many people may have advised you to pay off your mortgage early. That somehow you’ll reach financial freedom quicker if you pay your mortgage off early.
Is it true? In most cases, no.
As of March 2021, the 30-year fixed mortgage rate hovers around 3%. Think of this as a loan that you have to pay off at 3% interest rate.
As I mentioned earlier, the average S&P 500 annual return is 10-11% from 1926 to 2018.
If you spent $100,000 to pay off your mortgage, the good news is that you’d be clear of that debt.
However, if you put that $100,000 into the stock market, you would have likely made (on average) 10%, or $10,000 in one year. After paying off the mortage interest ($3,000) you would have a net profit of $7000. I’d take $7,000 over nothing any day!
If you itemize your deductions on your taxes, you may also realize tax savings on your mortgage interest. That means even more money in your pocket, for NOT paying off your mortgage early!
The stock market will crash, so sell everything while you can
On any given day, you can find a stock market “guru” telling everyone to sell everything because stocks will fall 50%+.
But you just can’t time the market.
In early 2020, four senators were investigated for selling a large amount of stock after a coronavirus briefing, and before the markets crashed in March.
Since then, by 2021, the stock market had more than recovered. Unless the senators were both able to accurately sell at its peak and buy at its trough, their performance would have lagged behind the average investor who just held onto their stocks.
The likelihood of selling at its peak and buying at its trough is slim to none. There are many reasons why a vast majority of people cannot time the market. You can read more about it here.
You can’t lose money taking profits!
People think that they can’t lose money if they take money off the table right? Sounds intuitive right? Not so fast.
Let’s say you invest $100 in a stock. The stock jumps 50% to $150. You sell $100 worth of the stock and let the other $50 ride. There’s no way to lose money when you’re playing with house money right?
There are several wrong ways with this line of thinking.
If the stock continues to rise (which is most likely to happen because stocks rise over time), you won’t take part of the gains at the same scale since you sold some of your stock.
Also, when you sold $100 worth of stock, you’d have to pay capital gains tax on the realized gains. If you sold within one year of purchase, you’d have to pay a short-term capital gains tax which tends to be higher than long-term capital gains tax.
Stocks tend to rise with time. Don’t cash out until you need the money for a purchase or your next investment.
Just Pay the Minimum on Your Credit Cards
This one drives me crazy.
If you pay off your balance in full every month, you’re golden. It’s like borrowing money for free.
However, if you’re paying just the minimum every month, you’ll have to pay interest on the remaining balance. Most credit card interest rates hover around 15 – 25%.
Imagine buying a jacket for $100, but if it takes you a whole year to pay off your bill, you could be paying something close to $125! So not worth it.
Credit cards are a useful tool to build credit and rack up credit card rewards like cash back or points.
Use credit cards responsibly and pay off the balance IN FULL every month.
If you’re interested, you can even learn how to make money from credit cards here.
Keep Most of Your Money in Cash
Cash is king right? No… cash is definitely not king.
I hear it all the time.
“I have money in a savings account. But I don’t have any investments.”
By keeping money just in a savings account, you are losing money EVERY DAY.
Because of inflation, your money is rapidly becoming less valuable.
Savings accounts, if you’re lucky, are paying about 0.5% interest. Inflation hovers around 2%. That means your money is losing 1.5% in value every year.
$100 today will only be able to purchase $98.5 worth of goods next year.
Put your money to work by investing in the stock market.
Stocks on average return close to 10% a year.
Minus inflation and you’ve got close to 8% in real return on average.
Dollar cost averaging low cost index funds is the way to go, because you can’t beat the market.
Putting It All Together
You might not remember when you heard these bad investment tips, but they are prevalent everywhere. With a little research, common sense, and math, you might now realize how they were the worst investment tips ever.
Which of these bad investment tips were you following in the past? What will you do differently going forward?
