Posted By: CFP&WM On: Mar 15th, 2010 In: In the news Money Matters

Busting Financial Myths

Senior Spectrum – March 9, 2010

Perhaps you have seen the television show “Myth Busters”. The two stars of the program go about proving whether myths are true or not. Unfortunately there are many financial myths as well. Perhaps this article will help to disprove some of them.

  1. Dollar Cost Averaging will increase my return. Sorry folks, dollar cost averaging might make you feel more comfortable about investing a sum of money into the markets, however there is no evidence to justify this technique. This subject was covered in a previous article and alluded to by experts in the field. The primary reason it does not work is that the stock market rises more often than it falls.   So, the more you have in the market, and the sooner you invest it, generally the higher return. This is particularly true when you’re investing over long periods time.
  2. Picking the right investment is the main factor to high returns. Wrong again. It has been well known for a long time that having an asset allocation that is appropriate for your circumstances (mix of investments, stocks bonds and cash) is actually the factor that contributes the most to a higher return over time. Picking the right investment only contributed 4.6% while market timing account for only 1.8% of total investment return.
  3. I don’t need to worry about Long-Term Care costs because Medicare will pay for it. This is perhaps one of the biggest myths ever. Medicare does pay for skilled nursing care, but only for a limited time frame. The vast majority of nursing care costs are custodial in nature and Medicare specifically excludes this type of care. You’re on your own for this cost. Don’t expect the government to help you unless it is through the Medi-Cal program which, is for those who are indigent.
  4. It’s more important to save for my kids’ college than for my retirement. Every parent wants to feel like they can contribute to their kids’ education. College costs can be addressed in a number of different ways including loans and grants. Retirement can’t be financed through these options. In reality, saving for retirement is almost always more important than saving for your kids’ education.   Ideally, you should try to do both.
  5. It’s a better financial decision to buy a new car than a used car. Financially it makes more sense to buy a used car in almost every case because a new car has a huge depreciation factor (drop in value) just driving it off the lot. While a new car might make you feel more special, it’s not the best financial decision.
  6. It’s always best rolling your 401(k) at retirement into in IRA. Generally not true but it could be in some cases. Unfortunately, many people giving advice about making a change are hoping to sell you mutual funds and will make a big commission. Many 401(k) plans have very good choices available at a very low cost and should be retained. In some cases the 401(k)’s don’t give you enough diversification of investment choices and going to a no-load IRA would be a better choice.
  7. Actively managed mutual funds have higher returns than index funds. This debate has two sides. If you believe economists, college professors, and Nobel Prize winners, you know that over time, index funds generally provide higher returns than actively managed mutual funds. If you believe stockbrokers, Wall Street, Banks and big for-profit companies trying to make money off your investments, you may believe actively managed mutual funds do better… but there is no evidence to that effect in the long run.

Do you have some fact or myth that you would like some input on? Just ask!

Michael Chamberlain CFP®
Ca Registered Investment Advisor

Send your questions to mike@chamberlainfp.com or call 800-347-1340

This article is for informational purposes and should not be taken as legal, tax or investment advice.

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