Friday , 22 September 2017


These 9 Financial “Tips” May No Longer Apply – Here’s Why

We’ve all received unsolicited financial advice, often from well-meaning relatives and friends. In many cases, this advice is useful, but a lot of “classic” personal finance advice simply hasn’t aged well, and is now viewed as flawed. It’s just not applicable anymore in today’s world.

The comments above & below are edited ([ ]) and abridged (…) excerpts from the original article written by Tim Lemke (WiseBread.com)

Before you blindly accept any money advice you receive, be sure to do some additional research to find out if the advice is outdated. Here are 9 examples of financial tips that may no longer apply.

1. “Find a good employer and stay forever”

Many of us know an older relative that began working at a company as a teenager and then retired from that same firm four decades later. Often, they walked away with a sizable pension and even health benefits for life…

This doesn’t happen much anymore. Job security is not what it once was. A decline in labor unions means that guaranteed annual pay increases are a thing of the past – and a pension – forget it.

There’s a lot of evidence now that switching jobs periodically will result in higher pay increases and, with the introduction of 401(k) plans, retirement savings are portable when your employer changes.

2. “Pay off all of your debt as soon as you can”

This is not so much “bad” advice, it’s just less than ideal. Yes, it’s a fine goal to remain as close to debt-free as possible, but in the current environment, carrying some kinds of low-interest debt may be more beneficial for you in the long run.

Let’s say you have a 30-year fixed-rate mortgage and were fortunate enough to lock in a low 3.5% interest rate. Let’s also say stock market returns are averaging 7% per year. Over time, you’re going to be better off using any extra money you have to invest in stocks rather than pay off your loan early. Generally speaking, if your investment returns outpace current interest rates, there’s not much incentive to pay off debt early.

3. “Technology is a fad”

There was a time when some of the most savvy investors dismissed many tech stocks because they didn’t understand them. The bubble collapse of advertising-dependent dot-com companies in the late 1990s didn’t help the image of this sector but there’s no denying the fact that investing in technology companies with solid business models has been a clear path to wealth in recent years.

All you need to do is look at the incredible returns for companies like Amazon, Apple, Netflix, Facebook, and others. A full 15% of companies in the S&P 500 are technology companies, and they comprise most of the companies traded on the NASDAQ.

Tech stocks are still notoriously volatile, but if you ignore the sector completely, you’re ignoring some big potential returns.

4. “Max out your 401(k)”

While there’s still little question that you should take advantage of your employer’s 401(k) plan, people aren’t quite as eager anymore to recommend that you contribute the maximum amount allowed. That’s because over time, we’ve learned that the investment options and fees in many plans are rather lousy.

Now, the best advice is to contribute to your 401(k) up to the amount that is matched by your employer. After that, begin contributing as much as you can into a Roth IRA, which offers tax-free growth and a wide array of investment choices.

5. “Education debt is good debt”

Attending college isn’t a bad thing, but don’t be cavalier about the impact that student loan debt will have on your financial wellbeing. College costs are increasing, along with stories of students and new grads being weighed down by tens or even hundreds of thousands of dollars of debt…

Carrying this debt can create a ripple effect that impacts your ability to save, purchase a home, or invest – and student loan debt can’t be discharged in bankruptcy. Nowadays, any thought of borrowing for school should not be taken lightly.

6. “Diversify your portfolio with a mix of stocks and bonds”

Financial advisers have always emphasized diversification, but over time there’s evidence that younger investors don’t need to devote as much of their portfolio to fixed-income investments. Investing in bonds is useful for people who are nearing retirement age but if you’ve got a long way to go before you stop working, you’ll be best off with mostly stocks, which will offer much better returns and greater potential to meet your retirement goals.

There is more risk and volatility associated with buying stocks, but a long time horizon will give you plenty of time to recoup any losses and then some (especially since people are living longer than ever). If you’re not sure what stocks to invest in, pick a simple, low-cost index fund that mirrors the performance of the overall stock market.

7. “Try to become a millionaire”

There is an enormous amount of mystique surrounding the $1 million mark, and there’s no question that saving that amount is something to be proud of, but a million dollars won’t carry you as far as it once did…

If you plan to retire at age 60, keep in mind that you need your nest egg to last for 30 years or more. Will $1 million allow you to maintain your lifestyle and pay for things like long-term care? It’s certainly possible to retire with $1 million, but you may still have to live conservatively to make the money last.

8. “Always buy instead of rent”

Homeownership is a powerful thing. It allows you to build equity and get some possible tax breaks while also offering you a place to live but we’ve learned in recent years that it’s not for everyone.

Home prices are sky high in many areas of the country, and having a mortgage payment that’s too expensive can make it hard to save for the future or even live comfortably. Remember that just because you qualify for a loan of a certain size doesn’t mean that’s a sensible loan size for you.

The best advice now is to purchase a home if you believe you can make a large down payment and then comfortably make monthly payments while still saving for other future needs. If you’re not quite there yet, don’t fret. Renting is OK as long as you’re still saving, investing, and building your net worth in other ways.

9. “Buy Coca-Cola stock”

For decades, you’d often hear investors gloat about the consistent, predictably great returns from Coke. Heck, the great Warren Buffett owns a ton of shares and drinks several Cokes a day.

It’s still a good company, but anyone who bought Coca-Cola shares in recent years will have seen below-average market returns. Shares have risen just 18% in the last five years compared to nearly 70% for the S&P 500. Quite simply, the company has had to work very hard to maintain profits in an age when people are increasingly concerned about the health impact of sugary drinks and snacks.

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