Many of us never got any formal financial training, so there’s a lot we think we know that we don’t actually know. As Mark Twain once put it, “It’s not what you know for sure that gets you in trouble. It’s what you know for sure that just ain’t so.”
So let’s look at four money “facts” that just ain’t so:
Gold will keep you safe in a troubled economy.
If you watch much cable news, you’ve seen them: the ads touting gold start popping up at the least hint of bad economic news. Every time you see a gold ad promoting a “great way to preserve your savings,” remember that a company has paid a lot of money for that advertising time. They expect to make a good profit from the sales of gold.
And buying physical gold is tricky. You need to negotiate a price. Every time. When you buy or when you sell. Usually you will have to deal with a person who does this for a living. They know what they can buy and sell for. They need to sell to you higher than they bought. And they need to buy from you lower than what they’re going to sell for. It’s hard to get ahead.
The benefit of gold is that it holds its value regardless of inflation or the value of currency. But think about it. In 1900 an ounce of gold could buy you a decent tailored suit ($20). Today (118 years later) an ounce of gold will buy you a decent tailored suit ($1,336).
But if the economy is in ruins, you might want a cellar full of canned goods and ammunition, rather than a cellar filled with gold coins or decent suits. Writers at The Atlantic agree.
My home is a great investment.
Yale economist and Nobel prize winner Robert Shiller crunched the numbers and started the debate on this topic. He argues that that, overall, the housing market barely outpaces inflation. The Washington Post analyzed his data and put a number on it. They reported that, over the past 100 years, home prices have only grown at a compound annual rate of 0.3 percent, adjusted for inflation. The numbers don’t lie: the idea of your home as a great investment doesn’t hold water.
Bonds are always safe.
This is a little like saying that all cars are safe. There are a wide range of cars in the world, just like bonds. And like bonds, some “safe” cars can be sort of risky in the wrong hands or under unusual conditions.
If you buy $10,000 of 10-year bonds from AAA-rated ACME company, paying 6 percent interest per year and expect to hold them until maturity, you are pretty safe. You can expect that a “safe” company like ACME will pay the $600 per year of interest and that ACME will pay back the $10,000 at the end of 10 years. The AAA rating says that rating agencies have agreed that ACME is a good credit risk, and typically it will be.
But a bond is essentially a loan agreement. If you are buying a bond fund, that trades bonds, you might find that changes in interest rates, or other market news causes the daily price of your bond fund to change a lot. Sometimes that price change can make it hard for you to protect your investment principal over time.
Every financial advisor is the same.
First, there are no qualifications required call yourself a financial advisor. So it’s wise to ask some questions.
Second, many financial professionals are compensated to sell products. For example, many financial professionals are registered representatives of brokerage firms. They are required to attain a Series 7 license from the Financial Industry Regulatory Authority. This license allows stock brokers to receive a commission from the sales of investment securities. So, a stock broker has her compensation directly related to the products a client purchases.
Likewise, life insurance agents are compensated on commission for the insurance products they sell.
A fee-only advisor gets no compensation from any product. They work only for their clients. They have far fewer conflicts of interests with clients. They are paid to advise and direct the client toward their goals, regardless of products. I think this arrangement allows me to better serve my clients’ interests.
Third, a fiduciary advisor is bound to place the clients’ best interest first at all times. Some advisors act as a fiduciary some times. Others operate always as a fiduciary, like me.
Fourth, Certified Financial Planner professionals are trained to analyze all aspects of a family’s financial life. They can provide advice and assistance in budgeting, risk management and insurance, tax planning, saving strategies, investing strategies, retirement income strategies and estate planning. To assure you are working with a well-trained financial planner, look for a CFP® professional.
- Gold is not the answer. For the last 50 years gold has returned 219 percent after inflation.
- Your home is a great place to live but not usually much of an investment. For the last 50 years homes in the Minneapolis–St. Paul metro area have returned -2.46 percent after inflation.
- Bonds are not always the best investment. For the last 50 years the U.S. Treasury 10-year bond has returned 32 percent after inflation.
- A great financial planner is worth way more than you will every pay them.
If you would like to talk about some other financial myths, contact my office at firstname.lastname@example.org. I am always happy to meet with people who are working on their financial plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.