You know the
problem with financial advice? It’s the people who dispense it:
Insurance salesmen, bankers, property agents…most people in position to give
good advice also have no motive to do so. They’ve all got an angle of some
sort. 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 reliable
advice. Instead you get dangerous gibberish, like:
1. The Rental Income Will Pay For The
Property
This
argument suggests property is practically free. You take a home loan, then rent out the house. The rental income
will then cover part (or even all) of the repayments.
Look, if it
were 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 advice
assumes rental income is consistent. It’s not. Tenants pay late, dispute
contract terms, and don’t renew leases. Ask any landlord: Getting tenants to
behave is like training cats to execute parade drills. Then there’s the global
market: If MNCs implement cutbacks (like now, thanks to the Euro crisis),
expatriate tenants start heading home.
It’s true
that property is the best investment. But the problem with this advice is
presumption: Never assume the rental income will cover the home loan. Always be
prepared to upkeep an empty apartment for a few months.
And if you
can’t afford loan repayments without rental income, you can’t afford the
property.
2. Forex Trading Will Make You
Millions
Question: How does an amateur trader make a
million dollars on Forex?
Answer: Start with two million.
95% of Forex
trading accounts close in the first year. Most dabblers break even; a pitiful
few lose everything. Either way, it’s a waste of time and money.
That’s
because Forex seldom rewards day traders or dabblers. Don’t get me wrong, it is
a viable path to wealth. It’s just not as easy as brokers pretend. Take a look
at the typical successful Forex investor:
They start
with massive capital (sometimes in the millions), can afford to lose
significant sums, and almost always have a career in finance. Moving money
around is their full time job. Do you seriously think reading your Dummies
Guide to Forex puts you on the same level? That’s like trying to join a PGA
tour because Tiger Woods once gave you a golf tip.
In short: If
you are the sort of person who could make millions on Forex, you wouldn’t be
listening to the broker. The broker would be listening to you.
3. Budget First
Most people
only start budgeting once they feel “squeezed”. A common cause is a major
purchase (e.g. a car or house). Then these people panic, decide to budget, and
find they can contain their expenditures like a haemophiliac can control blood
loss.
A better
idea is to try to grow your income first, and budget if that fails. For
example, 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 of
starting a spreadsheet to dictate your purchases for the next five years, focus
on finding ways to make more money.
Ask for a
raise, find some side-income, change your job. Exhaust every possible avenue of
growing your income, before resorting to budgeting. Remember: Earning capacity
first, and budgeting second. It should be common sense.
4. Buy Big Company Shares When They
Drop
Sometimes
this comes from amateur investors. Other times, it comes from market
manipulators who are looking to offload garbage.
The idea is
that 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 major
corporate establishment, and “it’ll recover for sure”. So buy the shares now,
while they’re cheap.
People who
cite this advice will invariably mention Apple, and how low Apple shares used
to be. Well here’s a counter-example: Kodak. Sometimes, shares go down and stay
down. Sometimes, a company’s product is absolutely, irrevocably doomed. There
will be no recovery, and the money you put into it is just lost.
“Always buy
when 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 the
share value to rise again.
5. You Are Young, You Can Afford To
Take More Risks
And being
young, you’re also more likely to survive bear attacks. Does that make you more
inclined to strap raw steaks to your ass and climb into a polar bear’s cage?
Look, it’s
true being younger has advantages. You can take longer loans, you have more
working years, and you can live off Maggi Mee for months. But that’s not an
accurate form of risk assessment. The amount of money you can lose is based on
your 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 young
student with just $5000 in the bank, you can afford to lose less than a 50 year
old businessman with accumulated assets. And that’s how you should calculate
acceptable risks: Based on the money and assets you have.
