Debunking Investment Myths

Investing too often seems like an unsolvable mystery riddled with myths that keep women from putting their money to work. If you fall prey to these myths, your savings will not earn the returns you deserve, and you will miss out on the professional advice to which you are entitled. Just ask Sima Desai, MD, a section chief and associate program director at Oregon Health Sciences University in Portland.

During her residency, Dr. Desai didn’t earn much money, but she did manage to accumulate some funds. After she finished her residency, she continued to add to her savings. But she wasn’t getting anywhere. As she puts it, “What advisor wants to work with someone who has far less than $100,000, let alone $250,000, to invest? Will anyone even talk to me?” Fortunately, Dr. Desai was soon debunking one of the key investing myths: her attorney referred her to Robert Haley, a financial professional with Portland’s Advanced Wealth Management.

What are these investing myths? There are many, but here are half a dozen that come up again and again.

Myth #1
Financial Professionals Demand Big Bucks

As Dr. Desai found out, a referral is key to getting “in” with a top financial professional, especially if you have well under the official “minimum” of investable assets.

Certified financial planner Linda Rhea, past president of the Colorado Society of Certified Financial Planners, is a big fan of referrals. According to Rhea, “Some of the top money managers in the country will say their minimum account size is $250,000, but if you are referred to their firm, they will almost always waive their minimum. Robert Haley agrees, emphasizing, “I don’t require a minimum [when the client is from a referral source] because it is more important to cultivate the centers of influence—the attorneys, accountants, and others—who make these referrals.”

If you want to work with the best financial professionals, ask for referrals. As Dr. Desai points out, “I would be in a very different place today [five years later] if I hadn’t been referred to Bob [Haley].”

Myth #2
Stocks Deliver Better Returns Than Mutual Funds

Many would-be investors believe stocks are the way to go for the best rate of return. But as Haley points out, “You need at least 40 different stocks to spread your risk.” Mutual funds offer built-in diversification—a primary way to reduce risk. Haley believes holding individual stocks is the better method for keeping control over your taxes, however, because you can sell at any time to take gains or losses. But he offers exchange-traded funds (ETFs) as a way to have the best of both worlds, since ETFs also allow you to choose when you sell or buy.

Mutual funds can be an excellent vehicle for retirement savings because current taxes are not an issue. ETFs, which are a form of index fund that is actively managed, give you more control than mutual funds over managing tax risk (the low costs/turnover affords a large measure of control over capital gains taxes).

Myth #3
Only Older People Should Invest in Bonds

Bonds are an essential part of almost everyone’s portfolio. They tend to balance out the volatility of the stock market, creating a reliable rate of return to offset some of the market’s ups and downs.

Camilla Neri of Retirement Capital Strategies in San Jose, California, specializes in working with female executives, professionals, and business owners. In her opinion, choosing the right mix of bonds, CDs, and stock-based investments is “a balancing act.” She says, “Your investment allocation has to reflect your level of comfort with volatility while meeting your goals and desired rate of return.” Bonds alone won’t do this, but neither will stocks, mutual funds, nor ETFs.

Most financial professionals recommend that you put at least a portion of your portfolio into bonds or other investments with a fixed rate of return. To take advantage of tax deferral and to reduce the impact of future taxes on retirement accounts (in which the tax-deferred contributions and growth will be taxed at income tax rates), it makes sense to put bonds into retirement accounts and stock-based investments in non-retirement accounts. This, along with other planning techniques, can lead to “tax efficiency.”

Myth #4
Pay Off Your Mortgage

Frank Bearden, an ethics specialist in San Antonio, Texas, was in the oil business in Oklahoma during a “bust” cycle in the oil patch. That’s when he realized that cash has value beyond the face amount of the actual bill. “People had ‘piles of cash’ and sunk it into their houses. Then the bottom dropped out of the [housing] market.” That cash lost value fast.

Today’s shaky real estate market and imploding mortgage industry are like “déjà vu all over again.” Equity is vanishing and mortgages are exceeding the value of many people’s houses.

Residential real estate has a clear purpose: a place to live. But expecting your home to fund your retirement can lead to bitter disappointment. Planning on continually rising values to offset taking out a subprime mortgage is risky. And pouring money into real estate at the expense of building retirement and nonretirement assets can be a recipe for disaster.

Myth #5
Investing Can Wait

When it comes to building and growing your investments, there is no time like the present. Here’s a table to show you the high cost of delaying investing for five years.

As you can see, the cost of waiting just five years can be incredibly high. And if you are missing out on “free” money, such as an employer match to your company-sponsored retirement plan, the cost is even higher.

Myth #6
Retirement-Plan Money Is Locked Up

As the table in Myth #5 shows, in 15 to 25 years you can amass a significant amount of money. If this money is inside a traditional 401(k), 403(b), or tax-deferred individual retirement account (IRA), you can actually get to it before you turn 59 1/2, thanks to section 72(t) of the Internal Revenue Service Code, which allows you to take “substantially equal payments for five years or until you turn 59 1/2, whichever is longer.” As long as you pay the taxes due, there is no 10 percent penalty.

So, if you had $2 million at age 50 and wanted to retire and tap the funds, you could take between roughly $7,300 and $10,500 per month if you began withdrawals in 2008.

The Wrap
Your options are many. And the myths are just that—myths. Financial professionals want to work with you, especially if you are referred to them by a member of their network.

The cost of waiting is high. The time to start is now.

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