You know theproblem with financial advice? It’s the people who dispense it:Insurance salesmen, bankers, property agents…most people in position to givegood advice also have no motive to do so. They’ve all got an angle of somesort. And short of strapping them in a chair and going at them with a golf club(pick the bankers, it legally counts as pest control) you can seldom get reliableadvice. Instead you get dangerous gibberish, like:
1. The Rental Income Will Pay For TheProperty
Thisargument suggests property is practically free. You take a home loan, then rent out the house. The rental incomewill then cover part (or even all) of the repayments.
Look, if itwere that simple, I’d be getting plastered in an Amsterdam nightclub right now,instead of writing this for a living. But I know better.
This adviceassumes rental income is consistent. It’s not. Tenants pay late, disputecontract terms, and don’t renew leases. Ask any landlord: Getting tenants tobehave is like training cats to execute parade drills. Then there’s the globalmarket: If MNCs implement cutbacks (like now, thanks to the Euro crisis),expatriate tenants start heading home.
It’s truethat property is the best investment. But the problem with this advice ispresumption: Never assume the rental income will cover the home loan. Always beprepared to upkeep an empty apartment for a few months.
And if youcan’t afford loan repayments without rental income, you can’t afford theproperty.
2. Forex Trading Will Make YouMillions
Question: How does an amateur trader make amillion dollars on Forex?
Answer: Start with two million.
95% of Forextrading accounts close in the first year. Most dabblers break even; a pitifulfew lose everything. Either way, it’s a waste of time and money.
That’sbecause Forex seldom rewards day traders or dabblers. Don’t get me wrong, it isa viable path to wealth. It’s just not as easy as brokers pretend. Take a lookat the typical successful Forex investor:
They startwith massive capital (sometimes in the millions), can afford to losesignificant sums, and almost always have a career in finance. Moving moneyaround is their full time job. Do you seriously think reading your DummiesGuide to Forex puts you on the same level? That’s like trying to join a PGAtour because Tiger Woods once gave you a golf tip.
In short: Ifyou are the sort of person who could make millions on Forex, you wouldn’t belistening to the broker. The broker would be listening to you.
3. Budget First
Most peopleonly start budgeting once they feel “squeezed”. A common cause is a majorpurchase (e.g. a car or house). Then these people panic, decide to budget, andfind they can contain their expenditures like a haemophiliac can control bloodloss.
A betteridea is to try to grow your income first, and budget if that fails. Forexample, say you’re going to buy a car or a house. On your current income,you’ll live about as comfortably as a a pomfret in a desert. Instead ofstarting a spreadsheet to dictate your purchases for the next five years, focuson finding ways to make more money.
Ask for araise, find some side-income, change your job. Exhaust every possible avenue ofgrowing your income, before resorting to budgeting. Remember: Earning capacityfirst, and budgeting second. It should be common sense.
4. Buy Big Company Shares When TheyDrop
Sometimesthis comes from amateur investors. Other times, it comes from marketmanipulators who are looking to offload garbage.
The idea isthat big business is cyclical; when a big company’s shares decline in value,it’s just a matter of time before they go back up again. Because it’s a majorcorporate establishment, and “it’ll recover for sure”. So buy the shares now,while they’re cheap.
People whocite this advice will invariably mention Apple, and how low Apple shares usedto be. Well here’s a counter-example: Kodak. Sometimes, shares go down and staydown. Sometimes, a company’s product is absolutely, irrevocably doomed. Therewill be no recovery, and the money you put into it is just lost.
“Always buywhen low” is a bad assumption all around. If you don’t understand a company,don’t bet on its recovery. Even if it does recover, it could take years for theshare value to rise again.
5. You Are Young, You Can Afford ToTake More Risks
And beingyoung, you’re also more likely to survive bear attacks. Does that make you moreinclined to strap raw steaks to your ass and climb into a polar bear’s cage?
Look, it’strue being younger has advantages. You can take longer loans, you have moreworking years, and you can live off Maggi Mee for months. But that’s not anaccurate form of risk assessment. The amount of money you can lose is based onyour income and savings, not on your age (or lack thereof).
In fact,this advice is so bad, sometimes its opposite is true: If you’re a youngstudent with just $5000 in the bank, you can afford to lose less than a 50 yearold businessman with accumulated assets. And that’s how you should calculateacceptable risks: Based on the money and assets you have.
