BOSTON (TheStreet) -- The public is hungry for guidance when it comes to their retirement strategy. The challenge is avoiding bad advice.Your parents, bartender and hairdresser may all share their ideas as to how to best plan for the future. Your financial adviser certainly will suggest short-term moves and long-term strategies. The Internet is chock full of suggestions and self-proclaimed financial gurus telling you what to do with your money. Time and time again, however, even well-meaning guidance can be damaging.
|Your friends may want nothing but the best for you, but that doesn't mean they should dispense investing tips. If you can't fire them, don't use them.|
For decades, owning a home was seen as the single best investment one could make. Even though the collapse in home values since the recession should put to rest the theory prices will always rise, many still cling to the belief having a mortgage is smarter than paying rent. Yes, even post-bubble, there are benefits to homeownership. But buying a house is, and will always be, an investment. Like any asset, a home can rise and fall in value. Counting on your property as a nest egg carries more risk than the conventional wisdom of the past would suggest. "You think they would have learned by now," says Sal Lyazidi, senior vice president of investments for JHS Capital Advisors in Tampa, Fla. 2. Pay down your debt before you start saving
"Some say you have to be debt free before you start saving," Lyazidi says. "There are many different things in our lives every day, and the only way we will be able to have many of them is if we take on debt -- your car, your home, your education. You are going to have to borrow some money."He says the key is to manage that debt, not be controlled by it. Otherwise, you will lose out on the valuable and compounding returns your retirement plan could be earning.
Similarly, those who tout using a home equity line to pay off other debt may have a seemingly sound rationale: that the rates on these loans are almost certain to be more favorable than credit card terms, for example, and there are tax deductions to claim. So why is it potentially bad advice? To start with, the largest debt you are likely to have is your mortgage, and any move that makes it more likely that you will carry that burden into retirement is ill advised. There is also a limit on the equity you can leverage with your house -- a figure dropping along with home values. It may be wiser to keep that line of credit available for emergencies, home repairs or unexpected needs. Worst of all, not shredding those credit cards means that you only shifted debt, not eliminated it. "They will just rack up more and they will have double debt," Lyazidi says. "The other consideration with a home equity line of credit is a variable rate. Yes, rates are low now, but a few years ago rates were high. You should always go with the fixed rate that is not going to change." 4. Index (or actively managed) funds are the only way to go.
Both index funds and the actively managed variety have their champions and critics. It is a feud in investment circles that will persist as long as there are fund managers. When building a portfolio and retirement savings, keep in mind your own cash needs and projections. Work with a professional to truly understand your risk tolerance. Then, with those factors well understood, choose the approach -- possibly a combination -- that best suits your goals, not the cheerleaders backing their chosen "team." 5. You are doomed, doomed I tell ya.
On a constant basis, we get press release pitches and studies focused on the same general theme: No one has enough saved for retirement and crisis looms for individuals and society. True enough that many, many people are well behind the eight ball when it comes to securing their future finances. But pessimism can lead to paralysis, and the drumbeat of disaster can lead people to just give up. In fact, it is almost never too late to start saving for retirement, and you are never too old to take the steps needed to maximize the time horizon you have. Curtis DeYoung, founder and president of American Pension Services in Riverton, Utah, says large brokerages have a lot to gain by encouraging investors to save more, but the "run for the hills" talk can backfire. "You've got about $5 billion a week going into these retirement plans," he says. "That's a whole lot of money. That's why nearly every financial institution commercial only touts the value of their retirement plan product. All of the brokerage houses are all trying to get your retirement savings." The result, building upon recession-era fears, is that people can stop being actively involved with their plan. "I do seminars all over the United States where clients say, 'I don't know how much is in my old retirement plan' or 'I don't even open my statements, they just go down.' They are so disconnected from their own money. 'If it is going to keep losing money, I will stop contributing to it and therefore I don't need to open the statement, because what's there is what's there.'"
"The No. 1 bad piece of advice I hear is when they say you don't need anyone's help, you can do this on your own," Lyazidi says. "I couple that with, 'I don't need to talk to a financial adviser now, let's talk when I have some money in the bank,'" he says. Lyazidi stresses that its not a measure of someone's intelligence to suggest they are wrong with such thinking. It is that they lack the very specific expertise needed to make the right decisions and evolve strategies. "Part of our job is to help you get that money, not just buying low and selling high or whatever the case may be," he says. 7. 'My accountant says to ...'
"Let me talk to my accountant," is a phrase financial advisers hear often, Lyazidi says. Others cite the need to talk to their lawyer for financial guidance. The mistake there is that any such specialty can play an important role in your life, but lack the financial knowledge and experience to adequately weigh in. "Many times I have found that the accountant is simply focused on the IRS and not much else," he says. Similarly, heeding advice from friends and family may not cost anything, but that hardly ensures it is a bargain. Many times, these well-intentioned confidants are inclined to agree with you and reinforce whatever it is you wanted to hear. "Keep the nepotism out so that you get a good, objective answer," Lyazidi says. "Nobody is perfect, and if you make a mistake it shouldn't have to affect your other relationships. My rule of thumb is if you can't fire them, then don't use them. They shouldn't be there. They are just giving you advice out of the goodness of their heart." 8. You can time the market.
You would be hard-pressed to find a reputable financial adviser who would suggest this with a straight face. But time and time again people fall prey to the water cooler suggestions about what stock is destined to shoot up -- or down. It can be a result of how easy it is to trade these days. "Once the Internet was created we had the biggest boom ever in the stock market, and it had nothing to do with the value of the companies," DeYoung says. "It had to do with the ease and accessibility of getting into the stock market." 9. Investing is always for the long term.
"Buy and hold is extinct," Lyazidi says. When people echo advice that they need to hold onto their stocks for the long term, through ups and downs, he counters with a suggestion that they cannot get "emotionally attached." As he sees it, market volatility means investments need to be short term. Each investor needs to develop a reasonable return they desire and the largest drop they can handle. Reaching either of those targets, even if it happens in a matter of days, is a trigger to get out, even if it could mean leaving some gains on the table. 10. You are too young to worry about the future.
Being young and healthy is no excuse to not have an estate plan in place. In fact, those characteristics can mean more affordable insurance with better benefits and the time horizon needed to make sure your ever-evolving wishes are met. And, to add a dose of the morbid, that bus hurtling down the street as you step off the sidewalk doesn't care how healthy you are. -- Written by Joe Mont in Boston. >To contact the writer of this article, click here: Joe Mont. >To follow the writer on Twitter, go to http://twitter.com/josephmont. >To submit a news tip, send an email to: firstname.lastname@example.org.