Monday, June 8, 2009

5 Money and Investing Misconceptions



Since there isn't all that much to discuss about the markets yet this week, I thought I'd write a little post about some of the misconceptions I have heard throughout the years about finances, money, and investing in general. Here they are The 5 Money Misconception:

#1 Investing in Stocks Is the Same as Gambling
This is the furthest from the truth as you can get. Over the last 50 years the Dow has had an average return of close to 11% per year. That is a heck of a lot more money then your average return at a casino which is guaranteed to be a loss if you play long enough. Investing in stocks you know nothing about for the short term is the same as gambling, but investing in stocks which you have researched, and diversified, and leaving the money in them for a few years will almost always have a positive return. Diversification and patients are key. Even those people who invested in a diverse portfolio right before the market crash of 1929 would have has gains if they held long enough.

#2 The Misconception between "Good Debt" an "Being in Debt".
There is a major difference between being in debt, and having debt. Being in Debt is never positive. You are in debt if your assets you own are valued less then the assets you owe. This situation is never good, and it means you are spending more money then you are making, and will likely lead to all sorts of problems. On the other hand, having debt means owing money. For instance you may take out a mortgage for a house. You may owe $200,000, but likely the home value is greater than that $200,000. Even if you have cash to buy a home, sometimes it's better to take the mortgage (debt) and invest the cash in an investment vehicle that yields more than the rate you are paying on the mortgage. In that case, the debt is "Good Debt".

#3 The Wealthiest Americans are those Who Work Hard at their 9 to 5 Jobs
The facts are that it is nearly impossible to become very wealthy working for someone else. Over 90% of Americans with a net worth of over $8 million got their wealth by either starting up their own business or an inheritance.

#4 Money is Only for Buying Stuff
Most people think that the sole purpose of money is to buy things to make us happy. The people who are the happiest though are those that save money. Wondering why? Some of the biggest problems we face revolve around money. Not what we can and can not buy, but our long term piece of mind. Those people who save money and invest it, are much happier, healthier, and much more worry free then those who send their money more liberally. Buying something may make us happy for a few hours or days, but knowing that we have no financial obligations, and have financial freedom can make us happy for a lifetime. 50% of all Marriage conflicts revolve around money problems.

#5 If all the Experts are Investing in Something, it must be a Great Investment

The facts are that those who stray from the herd are usually the ones to succeed. This means buying when everyone else seems to be selling (case in point, when I recommended buying into the market in the 7000 range a few months back when the media was filled with gloom and doom.), and selling when everyone else seems to be buying. Take for instance the housing bubble. All the experts were telling us how great a value real estate still was, even though in some areas prices had doubled in only 5-6 years time. Mass buying or selling usually results in a market correction that will likely cause a bubble to collapse. Be your own person. Think for yourself.

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