When it comes to money, there is a lot of hoopla. As I witness the financial frenzy that comes with each fad, I am reminded of the days of snake oil salesmen, taking advantage of the hopes and dreams of many to fill the coffers of the immoral. When I watch the late night “Get rich quick” schemes, I wonder if anyone is getting rich other than the professional, perpetrator or pastor selling the book being featured. Some of the advice shown on television isn’t bad, but as a Finance Professor, some of the advice makes me shudder. Not to say that all of the self-proclaimed “financial experts” are immoral or incorrect, but it is not hard to find flaws in their perspective.
Being mislead causes the most pain to those who do not understand money. Many people do not understand the basics, which can make them vulnerable to those who use long words to confuse them. When I teach Finance courses to my students, I enjoy finding simply ways to communicate complicated concepts. The ultimate goal is for the student to be able to discern the good advice from the bad.
I have compiled a list of quick and dirty myths about money and finance that can help you to get started on your path toward financial understanding. While this is just the tip of the iceberg, perhaps the ice will whet your appetite to learn more about the world of financial management.
Myth #1) An investment is only good if it helps you to earn more money
According to quite a few financial advisors, every penny you invest should be put into assets and ventures that are going to give you a financial return. The “gurus” tell stories about how investing your money to make more money implies that you are smarter than the person next to you. By virtue of your being smarter, you are therefore entitled to a happier life. Money is also made into the most important thing on earth, and you end up feeling bad if you are not, as you are sometimes told, hoarding every penny and allowing those pennies to dominate your personal life.
There are quite a few scenarios in which money should be used to make more money, and there is nothing wrong with that. But more money doesn’t always imply you will have a wealthier life. There are times when buying a car or taking a vacation can be much better uses of your money than buying another stock, bond or piece of real estate.
In fact, if the sole objective of money is to make more money, then that means you should just send your children to Dr. Kervorkian (the man who kills people for a living), since kids are expensive and don’t give you any of your money back. Don’t be so hard on yourself when it comes to investing. Investment is like working at the office or having sex: it’s ok, as long as it’s done in moderation.
Myth #2) Only some investors have a portfolio
What is a portfolio? A portfolio is a set of valuable investments that give you something back. When I ask my students “How many of you have a portfolio?”, only a few of them raise their hands. I then explain that making an investment is equivalent to putting a scarce and valuable resource toward the creation of something more valuable over time. Most of the students fail to realize that money is NOT the only scarce resource you can invest. You can also invest your time, your energy, your health and even your love. All of these amount to allocations of scarce resources, and most of us make these investments every single day. The decision to get out of bed is an investment, since you could easily spend your time lying around watching TV. The clothes on your back are part of your portfolio, since you have invested to obtain them, and they do provide you a return (your reward for investing in clothes is that you get the peace of mind of looking good and not having to walk around naked!).
The point here is that you should have a more complete way of thinking about investing. Money is only one type of investment, and it is sometimes the least valuable asset in our life portfolio. You have probably heard people say “time is money”. Well, that’s not exactly true. The truth is that time is MORE VALUABLE than money! If you are 22 years old, and you waste your time, you will never get to be 22 years old again. No amount of money can make up for being, say, falsely incarcerated for 15 or 20 years. However, if you lose money, you can usually get it back later. So, whether we have money or not, we are always investing.
Myth #3) The stock market is one of the best places to make money
The stock market is not a great place to make money, at least not in the short-run. It is a great place to keep the money you’ve already made. Don’t get me wrong. There are many people who’ve made their fortunes trading stocks, but that is not the norm. Additionally, even though there are many who’ve made a fortune trading stocks, more fortunes have been made using other investments. The stock market is what they call an “efficient market”, which means that it is tough to find a good bargain. This is a lot different from some other markets, where you can find a pretty good deal if you look hard enough.
When looking for a place to invest your money first, you should start with the investments that offer the highest return for the lowest risk. In other words, if you find something you are familiar with, you are likely to have a better outcome. One place to start might be with an investment in YOUR SELF. Do you have enough education to have the kind of career you would like? How about going back to school for that college degree or MBA? In my own research, I have determined that the returns to this kind of investing far exceed the returns generated from the stock market or other places.
You might also consider investing in Real Estate or even in the business of a relative. If you have a friend that is going into business, and you have reason to believe that this person is fulfilling an unmet need, has a guaranteed customer base, and is reliably going to give you your money back, then this kind of investment might be better than going right to the stock market. Just make sure that you sign a legal contract so there are no misunderstandings.
You can also make a lot of money by cutting your spending. Consider the following two options. Let’s say you have a credit card that charges 15% interest with a balance of $10,000. You have $10,000 available for investment, and you can either use the money to pay off the credit card or invest in stocks. Let’s also assume that you expect to earn 10% on the stock market (roughly what the US stock market earned during the 1997 – 2001 time period). There are two things you must remember about this investment:
1) The amount you are paying on your credit cards is greater than what you would earn from the stock market.
2) The amount you would earn from the stock market is risky, so it could be higher or lower than the average. The amount you are paying on your credit card is going to be the same, no matter what.
So, you have two choices: You can either a) invest the $10,000 in the stock market, earning an average of 10%, or you can b) Use the money to pay off your credit cards, ridding yourself of the 15% interest expense. If you go with option a) (investing in the stock market) and assume that you are guaranteed 10% on your money, you will earn $1,000 and have to pay $1500 in credit card interest (15% x $10,000). This leads to a net loss of $500.
If you go with option b) (paying off the credit cards and not investing in the stock market), you can save $1500. So, there is a $2,000 ($1500 – (-$500)) difference between these two choices.
The point is simple: “A penny saved is a penny earned”. You can rephrase this statement as “A penny not paid in interest is a penny earned in interest.” By using excess funds to pay off high interest debt, you have found one of the best investments around.
The point of this article is the following: Investing in the stock market is nice and glamorous, but it’s not the way to make money. If you really want to make money, you should start with investments around you: Buying a home, paying off credit cards, or going back to school. These investments give higher returns than the stock market and lead to a wealthier life.
Showing posts with label myths. Show all posts
Showing posts with label myths. Show all posts
Friday, January 30, 2009
3 Myths About Investing - Part 2
This is the next step in our series about investing myths and common mistakes that people make. Please read the prior article to catch up if necessary. Investing can be simple if you are in possession of a few key facts, and as your friendly Financial Physician, I can arm you with the tools you need to head down your path of financial understanding. I congratulate you for choosing to expand your financial knowledge base.
Myth #4) If you own a large number of US companies, then you’ve spread your money out well enough
Diversification is one of the most critical dimensions of investing. To make it simple, diversification means that you should not put all your financial eggs in one basket. Your grandmother probably gave you similar advice as a child, so you know where I’m coming from.
When you put your money into financial assets, the simple idea is that you don’t want to be overly exposed to risk and potential loss. Even if you think that an investment is a “can’t miss” opportunity, you are asking for trouble by putting too much of your wealth in one place. You may have seen the play “Raisin in the Sun”, in which one of the characters put the family’s fortune into a liquor store and saw his good friend Willy run away with the money. Whether it’s Willy or Enron, don’t let that happen to you.
Your broker may talk about diversification by stating that you should make sure your money is placed into several stocks at once. He might tell you that investing a percentage of your funds into GM, IBM, Microsoft and a few other US companies will do the trick when it comes to diversification. I hate to say it, but that message is WRONG.
First, investing should be international, not domestic. By only investing in American companies, you are missing a big piece of the global financial puzzle. If the US economy goes south, then so does your money. Also, some of the best opportunities exist in other countries.
Secondly, you should have your money placed in different types of investments. The stock market is just one place to put your money. You can also invest in real estate, a small business or even commodities and collectibles. The key idea is to spread your money around and to not get too excited about one type of financial outlet.
Myth #5) If a stock has done well in the past, it’s going to keep doing well in the future
One of the greatest myths in the financial world is the idea that a stock that has done well in the past is going to keep going up in price. Magazines fill their issues with a collection of stocks or mutual funds that did well the year before, and everyone clamors to buy these assets. The idea that a stock’s past predicts its future could not be further from the truth.
Research shows this is simply not the case. While it might seem logical that the past predicts the future, the truth is that stocks are priced based on a complex theory called “Rational Expectations”. Without going into what that theory implies, the bottom line is that any reasonable expectation that the stock is going to do better in the future has already been taken into account. For example, let’s say that you read the Wall Street Journal to find out that the Nike Corporation just signed a new deal worth an extra $1 Billion dollars. Your instinct might be to go purchase the company’s stock, in hopes that once the billion comes in the door, the price will go up. Sorry, but the truth is that the market immediately adjusts to that new information, so your ability to profit from the info is virtually non-existent. Additionally, all information about a stock’s future performance has been calculated into the current price. The truth is that its past performance can’t be predicted by ANYONE, not even a Finance Professor like me.
Would you like to know my own personal stock investment strategy? I buy a nice, diversified portfolio and then let it grow. I don’t try to pick winners from losers, and I don’t try to buy at the right time. I simply make consistent investments in the market (out of my pay every two weeks) putting those investments into a diversified portfolio. I then allow the thing to grow naturally. I don’t worry about price changes on the evening news, and I don’t sell nearly as much as I buy. What’s the result of this strategy? My money has steadily grown over the past several years.
Myth #6) The goal of money is to make more money
I study money and I have learned a lot about money. I have learned to appreciate and respect the power of money. But I have also learned the importance of keeping money in perspective. Money does not make your life wonderful: it simply enhances the beauty that your life already possesses. It can also be a protective force against some of the tougher choices we must make when our pockets are empty. Money is a tool for the improvement of your life and the lives of those around you, not the ends that one should pursue to find the holy grail of happiness.
At the end of the day, the goal is for you to be happy and fulfilled. The pursuit of wealth can play a role in this fulfillment, but you must be careful not to allow your pursuit of money to ruin the other valuable assets in your life. Money can be a means to happiness, but it is not the ends in itself. Keep that in mind as you go on your quest for riches.
Dr. Boyce Watkins is a Finance Professor at Syracuse University and author of Financial Lovemaking 101, Merging Assets with Your Partner in Ways that Feel Good. For more information, please visit www.BoyceWatkins.net
Myth #4) If you own a large number of US companies, then you’ve spread your money out well enough
Diversification is one of the most critical dimensions of investing. To make it simple, diversification means that you should not put all your financial eggs in one basket. Your grandmother probably gave you similar advice as a child, so you know where I’m coming from.
When you put your money into financial assets, the simple idea is that you don’t want to be overly exposed to risk and potential loss. Even if you think that an investment is a “can’t miss” opportunity, you are asking for trouble by putting too much of your wealth in one place. You may have seen the play “Raisin in the Sun”, in which one of the characters put the family’s fortune into a liquor store and saw his good friend Willy run away with the money. Whether it’s Willy or Enron, don’t let that happen to you.
Your broker may talk about diversification by stating that you should make sure your money is placed into several stocks at once. He might tell you that investing a percentage of your funds into GM, IBM, Microsoft and a few other US companies will do the trick when it comes to diversification. I hate to say it, but that message is WRONG.
First, investing should be international, not domestic. By only investing in American companies, you are missing a big piece of the global financial puzzle. If the US economy goes south, then so does your money. Also, some of the best opportunities exist in other countries.
Secondly, you should have your money placed in different types of investments. The stock market is just one place to put your money. You can also invest in real estate, a small business or even commodities and collectibles. The key idea is to spread your money around and to not get too excited about one type of financial outlet.
Myth #5) If a stock has done well in the past, it’s going to keep doing well in the future
One of the greatest myths in the financial world is the idea that a stock that has done well in the past is going to keep going up in price. Magazines fill their issues with a collection of stocks or mutual funds that did well the year before, and everyone clamors to buy these assets. The idea that a stock’s past predicts its future could not be further from the truth.
Research shows this is simply not the case. While it might seem logical that the past predicts the future, the truth is that stocks are priced based on a complex theory called “Rational Expectations”. Without going into what that theory implies, the bottom line is that any reasonable expectation that the stock is going to do better in the future has already been taken into account. For example, let’s say that you read the Wall Street Journal to find out that the Nike Corporation just signed a new deal worth an extra $1 Billion dollars. Your instinct might be to go purchase the company’s stock, in hopes that once the billion comes in the door, the price will go up. Sorry, but the truth is that the market immediately adjusts to that new information, so your ability to profit from the info is virtually non-existent. Additionally, all information about a stock’s future performance has been calculated into the current price. The truth is that its past performance can’t be predicted by ANYONE, not even a Finance Professor like me.
Would you like to know my own personal stock investment strategy? I buy a nice, diversified portfolio and then let it grow. I don’t try to pick winners from losers, and I don’t try to buy at the right time. I simply make consistent investments in the market (out of my pay every two weeks) putting those investments into a diversified portfolio. I then allow the thing to grow naturally. I don’t worry about price changes on the evening news, and I don’t sell nearly as much as I buy. What’s the result of this strategy? My money has steadily grown over the past several years.
Myth #6) The goal of money is to make more money
I study money and I have learned a lot about money. I have learned to appreciate and respect the power of money. But I have also learned the importance of keeping money in perspective. Money does not make your life wonderful: it simply enhances the beauty that your life already possesses. It can also be a protective force against some of the tougher choices we must make when our pockets are empty. Money is a tool for the improvement of your life and the lives of those around you, not the ends that one should pursue to find the holy grail of happiness.
At the end of the day, the goal is for you to be happy and fulfilled. The pursuit of wealth can play a role in this fulfillment, but you must be careful not to allow your pursuit of money to ruin the other valuable assets in your life. Money can be a means to happiness, but it is not the ends in itself. Keep that in mind as you go on your quest for riches.
Dr. Boyce Watkins is a Finance Professor at Syracuse University and author of Financial Lovemaking 101, Merging Assets with Your Partner in Ways that Feel Good. For more information, please visit www.BoyceWatkins.net
3 Myths About Investing - Part 3
As the third installment on our series on money and investing myths, we are going to discuss 3 additional facts that you may want to keep in mind on your quest for riches. If you wish to see the other myths outlined, please visit www.youtube.com/drboycefinance.
Myth #7) Building wealth involves a great deal of “know how” and expertise
Being a financial expert doesn’t necessarily hurt your chances of getting rich. But it doesn’t, by any means, guarantee that you are going to be better off than other people. Many of the greatest lessons I’ve learned about money management came from my grandmother, who never went to college and never earned more than $20,000 per year. She made a very simple statement, “If you are a spender, you will always be broke. If you are saver, you will always have money.” This taught me a great deal, as I found out that from my grandmother that the keys to money management exist within your psyche and your soul, not in the number of college degrees you have.
Understanding your personal relationship with money, as well as the reasons you over spend or under save can go a long way to developing your own personal path to financial fitness. Your financial freedom won’t be granted by a series of bells and whistles granted to you by financial experts. It will be provided by the use of good old fashioned discipline.
Myth #8) Buying stock in a good company means I’ve made a good investment
When I appear on radio shows or receive emails from those who support me, I am consistently asked if I can “recommend a good stock”. This is not a very good question, since a good company does not necessarily make for a good investment. Every financial asset has a price you should pay and the rules are simple: if you pay less than the asset’s value, you made a good investment. If your price is greater than the asset’s value, it’s a bad investment. So, a company with great profitability and solid cashflow can be a terrible investment for your portfolio. In fact, research shows that investors who purchase high flying “glamour” stocks are far worse off than those who purchase “value” stocks in companies that are financially distressed.
Myth #9) Mutual fund managers and stock brokers can predict the future
There is always a mad dash for the top performing mutual funds to get their names in the pages of leading financial publications. This is because they know that most investors tend to be “momentum traders”, meaning that they invest heavily in funds that did well in the past, expecting that these funds are going to do well in the future. While such assumptions certainly make sense, the problem is that they are simply fallacious. Financial research shows that mutual funds that did well the prior year usually have among the worst performance during the following year. At best, they are quite mediocre on average and there is very little connection between past performance and future performance.
Additionally, there an entire industry built around fund managers and stock brokers having the ability to convince investors that they can predict the future performance of a given stock or of the entire stock market itself. One such soothsayer, so good that he has a show on national television, was found to have horrible performance in the portfolios of stocks he recommended to his viewers. At the end of the day, you can’t predict the market and you can’t predict the performance of any particular stock. Even leading academic experts are virtually incapable of such a daunting task.
What we do know is quite simple. If you are a long-term investor with a well-diversified portfolio, then the following two facts remain true: 1) Your average return tends to be higher if you have higher risk. 2) Any losses you make on your portfolio in the short-term are typically recovered in the long term.
It’s really as simple as that.
Dr. Boyce Watkins is a Finance Professor at Syracuse University and author of “Financial Lovemaking 101: Merging Assets with your Partner in ways that Feel Good”. For more information, please visit www.DrBoyceFinance.com.
Myth #7) Building wealth involves a great deal of “know how” and expertise
Being a financial expert doesn’t necessarily hurt your chances of getting rich. But it doesn’t, by any means, guarantee that you are going to be better off than other people. Many of the greatest lessons I’ve learned about money management came from my grandmother, who never went to college and never earned more than $20,000 per year. She made a very simple statement, “If you are a spender, you will always be broke. If you are saver, you will always have money.” This taught me a great deal, as I found out that from my grandmother that the keys to money management exist within your psyche and your soul, not in the number of college degrees you have.
Understanding your personal relationship with money, as well as the reasons you over spend or under save can go a long way to developing your own personal path to financial fitness. Your financial freedom won’t be granted by a series of bells and whistles granted to you by financial experts. It will be provided by the use of good old fashioned discipline.
Myth #8) Buying stock in a good company means I’ve made a good investment
When I appear on radio shows or receive emails from those who support me, I am consistently asked if I can “recommend a good stock”. This is not a very good question, since a good company does not necessarily make for a good investment. Every financial asset has a price you should pay and the rules are simple: if you pay less than the asset’s value, you made a good investment. If your price is greater than the asset’s value, it’s a bad investment. So, a company with great profitability and solid cashflow can be a terrible investment for your portfolio. In fact, research shows that investors who purchase high flying “glamour” stocks are far worse off than those who purchase “value” stocks in companies that are financially distressed.
Myth #9) Mutual fund managers and stock brokers can predict the future
There is always a mad dash for the top performing mutual funds to get their names in the pages of leading financial publications. This is because they know that most investors tend to be “momentum traders”, meaning that they invest heavily in funds that did well in the past, expecting that these funds are going to do well in the future. While such assumptions certainly make sense, the problem is that they are simply fallacious. Financial research shows that mutual funds that did well the prior year usually have among the worst performance during the following year. At best, they are quite mediocre on average and there is very little connection between past performance and future performance.
Additionally, there an entire industry built around fund managers and stock brokers having the ability to convince investors that they can predict the future performance of a given stock or of the entire stock market itself. One such soothsayer, so good that he has a show on national television, was found to have horrible performance in the portfolios of stocks he recommended to his viewers. At the end of the day, you can’t predict the market and you can’t predict the performance of any particular stock. Even leading academic experts are virtually incapable of such a daunting task.
What we do know is quite simple. If you are a long-term investor with a well-diversified portfolio, then the following two facts remain true: 1) Your average return tends to be higher if you have higher risk. 2) Any losses you make on your portfolio in the short-term are typically recovered in the long term.
It’s really as simple as that.
Dr. Boyce Watkins is a Finance Professor at Syracuse University and author of “Financial Lovemaking 101: Merging Assets with your Partner in ways that Feel Good”. For more information, please visit www.DrBoyceFinance.com.
3 Myths About Investing - Part 4
This is the final installment of our 4 part series about money and investing myths. The goal of this series is to clear the weeds from our minds as we seek truth in our quest for financial independence. Read along and make sure that you go back to prior articles to find anything that you missed the first time around.
Myth #10) You can’t invest if you don’t have any money
We’ve all heard the statement, “You have to have money to make money.” While almost accurate, the statement is not entirely true. You don’t need MONEY to make money, you need CAPITAL to make money. Capital is anything productive asset that can be allocated toward investment in the quest to increase the value of that capital base overtime. For example, a man with $10 million dollars worth of chickens is wealthy, even though he has no cash. He can use those chickens to lay eggs, which can be sold for money on the market.
Any time you invest a scarce resource of value, you’ve become an investor. The less cash you have, the more creative you have to be in finding those assets that will form your highly critical capital base. Your capital might be human capital coming from training your children to do a job for you. It might be your own time, energy and passion invested in achieving your goals. The fundamental reality is that your most valuable assets are non-financial. Your health, your love, your happiness are all assets that you might not share for any trivial amount of money. So, the truth is that you were a billionaire on the day you were born.
Myth #11) Money can’t buy happiness
While it might be debatable whether money can buy happiness, one point is beyond debate: a lack of money can CERTAINLY buy unhappiness. Families can be ripped apart due to financial problems, and most of us spend a large percentage of our time worrying about our financial woes. Additionally, I must agree that money alone certainly can’t buy happiness. It is the creative and intelligent use of money that can buy happiness.
Money can allow a young mother the chance to stay home with her children. It can allow a son to pay for his father’s critical surgery. It can provide the peace of mind that comes from financial security and economic freedom. The truth is that money can certainly be a tool for the enhancement of your life. But while it can enhance your life, it can also destroy your life if you do not know how to keep things in perspective. Families that become obsessed with the acquisition and maintenance of wealth can find themselves losing focus on the things that matter most in our lives: family, love and happiness. So, remember: some of the richest people in the world don’t have any money at all and some of the poorest people in the world have billions.
Dr. Boyce Watkins is a Finance Professor at Syracuse University and author of “Financial Lovemaking 101: Merging Assets with Your Partner in Ways that Feel Good”. For more information, please visit www.DrBoyceFinance.com.
Myth #10) You can’t invest if you don’t have any money
We’ve all heard the statement, “You have to have money to make money.” While almost accurate, the statement is not entirely true. You don’t need MONEY to make money, you need CAPITAL to make money. Capital is anything productive asset that can be allocated toward investment in the quest to increase the value of that capital base overtime. For example, a man with $10 million dollars worth of chickens is wealthy, even though he has no cash. He can use those chickens to lay eggs, which can be sold for money on the market.
Any time you invest a scarce resource of value, you’ve become an investor. The less cash you have, the more creative you have to be in finding those assets that will form your highly critical capital base. Your capital might be human capital coming from training your children to do a job for you. It might be your own time, energy and passion invested in achieving your goals. The fundamental reality is that your most valuable assets are non-financial. Your health, your love, your happiness are all assets that you might not share for any trivial amount of money. So, the truth is that you were a billionaire on the day you were born.
Myth #11) Money can’t buy happiness
While it might be debatable whether money can buy happiness, one point is beyond debate: a lack of money can CERTAINLY buy unhappiness. Families can be ripped apart due to financial problems, and most of us spend a large percentage of our time worrying about our financial woes. Additionally, I must agree that money alone certainly can’t buy happiness. It is the creative and intelligent use of money that can buy happiness.
Money can allow a young mother the chance to stay home with her children. It can allow a son to pay for his father’s critical surgery. It can provide the peace of mind that comes from financial security and economic freedom. The truth is that money can certainly be a tool for the enhancement of your life. But while it can enhance your life, it can also destroy your life if you do not know how to keep things in perspective. Families that become obsessed with the acquisition and maintenance of wealth can find themselves losing focus on the things that matter most in our lives: family, love and happiness. So, remember: some of the richest people in the world don’t have any money at all and some of the poorest people in the world have billions.
Dr. Boyce Watkins is a Finance Professor at Syracuse University and author of “Financial Lovemaking 101: Merging Assets with Your Partner in Ways that Feel Good”. For more information, please visit www.DrBoyceFinance.com.
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