Facebook What is the worst piece of financial advice you've ever heard?
In December’s issue of Inside Personal Finance, we shared some of the worst financial advice our planners had ever heard. Here are a few more examples of truly awful advice. Take heed.
Tom Wood
Director, Financial Planning
Fairfax, VA
Terrible financial advice is given at the water cooler between employees in the typical office environment. It happens when stock markets are down and one person says to another, “Well, I moved all of the stocks in my 401(k) into bonds (or cash) and have stopped my contributions until the market improves — and you should do the same!” Obviously, this person likes to sell — and not buy — low, a perfect formula for dismal long-term investment returns and just the opposite of what they should be doing.
Darryl Payne
Associate Director, Financial Planning
Tysons Corner, VA
A person was advised by an advisor to use the $7 million he had made selling her business and invest it all in a closed-end munibond fund sold by the advisor. The total assets in the fund at the time were less than $35 million. A month or so later when the woman realized she had made a mistake and tried to liquidate, the share price subsequently dropped almost 30%. The person’s total net worth at the time of the investment was under $10 million. That’s the problem being a big fish in a small pond. When the pond starts to dry up, the big fish suffers first.
David Heinemann
Associate Director, Financial Planning
Silver Spring, MD
I was listening to the radio when I heard someone say “I believe the best indicator of future performance is past performance.” What makes it scary is that it was a financial advisor who said it. It’s no different than saying, it rained yesterday and it’s raining today, therefore it’s always going to rain. It is frightening that there are individuals and families who have turned to this person for financial advice and counsel.
Doug Rabil
Director, Financial Planning
Fairfax, VA
There are people who say that you should only contribute enough to your 401(k) plan to get the employer match and that you should not contribute more than this — that’s terrible advice. Employer retirement plans are the best way for you to save for retirement, regardless of whether there’s a matching contribution by your employer.
Al Burgos
Associate Director, Financial Planning
Bethesda, MD
Like germs, bad advice is everywhere, but it’s not always obvious at first. Sometimes you really need a microscope. One tell-tale sign is when statements are made in absolute terms:
• You can’t lose with real estate.
• Insurance is a great investment.
• Paying off your mortgage is the best move you can make with your money.
• You should never pay someone to do what you can do yourself.
• The best thing to do is to…
And so on…
The truth is that personal finance is more nuanced. The “right” advice varies as much as the people who need it.
Carl Sanger
Associate Director, Financial Planning
Garden City, NY
I once read an article in a newspaper that basically said you should hold off buying any investment until it breaks through an all-time high. The writer’s rational was that the investment must have momentum to continue rising. Obviously, this is the exact opposite of accumulating wealth by buying low and selling high. All the writer’s strategy accomplishes is ensuring that you miss most of an investment’s rally. You’d be left with losses, more times than not, when the investment falls in value.
Edward Hungler
Associate Director, Financial Planning
Northbrook, IL
I had one client who had 26 credit cards and $40,000 in debt and was telling me how smart she was to keep transferring her balances to 0% interest cards because she was essentially getting “free money”— not to mention the airline miles. I’m all for saving money, but those teaser rates never last. I set up a spreadsheet to show my client how much she was really paying. Today she is down to two cards and she will be debt free in 2012.
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