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IFB55: The Worst Money Advice that Beginners Always Hear

 

money advice

Welcome to episode 55 of the Investing for Beginners podcast.  Tonight Andrew and I are going to discuss some of the worst money advice you can get.

  • Invest 10% of your income
  • Investing in a quick fad to make money quickly
  • Try to get to cute and taking on more complexity just for the sake of it.
  • Buy a ETF index fund and be done with it.
  • Don’t get caught up in all the hype of the market.
  • Budget till it hurts

Andrew: yeah so I kind of I kind of made a list here. It’s kind of long try that keep it I’ll try to be concise but you we always know how that goes right so.

You see all the time and the more that time goes on the more and more people go to the internet looking for advice on how to handle their money a lot of times you’ll have people talk about hey I got $20,000 I got $40,000 maybe I have an inheritance what should I do what should I do what should I do?

And then you get all these people come out of the woodwork with all their different biases and all their different ideas and beliefs and all their personal experiences and they all kind of throw it in there and some of it can be good but a lot of it’s bad.

We want to talk about why that’s bad what things that you’ll tend to hear and how to kind of process that and make sure you don’t fall into these same traps and that’s really important because this is a huge part of learning how to handle your money and that’s not even just about investing or financial freedom or personal finance it really comes down to money itself and if you think about all the time when we spend 40 hours a week most of us working for money and then a lot of us don’t even spend a couple hours within our lifetime to really learn what to do after we make the money.

It just kind of flows in the now and then it becomes just this pointless thing to put food on the table when there’s actually plenty of opportunity to make that do much more for yourself than there currently does and unfortunately like we a lot of people like to kind of bemoan the fact that’s not really discussed in school and it’s not taught in school. A lot of people don’t learn about it unless either you seek it out or you’re lucky to have somebody kind of bring that advice to you.

And so obviously financial education is really important and part of that is learning whether a lot of the common misconceptions whether a lot of the kind of average pieces of advice that people give out to beginners and what how can we interpret it and kind of tackle this tackle it and really make it useful for us instead of hurtful.

I’ll start with an easy quick one you hear this all the time you hear people say invest 10% 20% 50% of your income and if we’re really being honest it’s an unrealistic thing to expect of people because percentages when you’re talking about income that’s going to vary a lot depending on how much you bring in.

Somebody who makes twenty thousand dollars a year cannot invest 10 percent of their income because if they do that they won’t be able to pay the light bill. Whereas somebody makes a hundred thousand could easily invest twenty percent of their income and have a very cushy life style outside of that.

I think that’s something first and foremost this the percentages when you talk about investments and income and personal finance it’s one of those kind of rules of thumb that we really need to kind of put an asterisk on. I think a good general rule Dave we talked about in one of the episodes with the Richest Man in Babylon the whole 10% rule I think once you kind of reach over a certain point of poverty that becomes a good rule of thumb and there’s ways like 401ks and IRAs that we’ve discussed before in different ways that you can kind of best efficiently invest that 10%.

But that tends to be a good and a general rule and obviously, the more you can invest the better because it will compound into even greater amounts of wealth as time goes on.

Another one that you hear a lot and this one drives me nuts you’ll hear some something will have some sort of money to invest and they want to find a way to make it grow and then you’ll have somebody who’s very excited about a certain investment and so they will talk about all the investment. So you’ll hear somebody talk about this investment and they’ll talk it up and because they believe in this so much they tend to really be overexposed in the investment and you know a lot of times they throw prudent concepts out the window like diversification dollar cost averaging.

And they’ll tend to really its kind of outrageous some of the things that you’ll hear that people do with their money and they’ll just freely talk about it too they’ll be like oh well I’m half invested in this tech stock in that tech stock.

Well that’s fantastic right the investment and there’s always a story and the thing about talking about whether it’s a stock whether it’s an asset class like Bitcoin if you’re talking about gold if you’re talking about real estate there’s always a story that you can twist and turn to make it sound like it’s something that’s going to really win in the future. And you can do the same thing with numbers and statistics and it’s really easy to weave narratives into beliefs that you want to believe yourself.

I know there are a few different biases that are in play there when you talk about that and so my problem with it is not so much that people are putting thought into what a investment might do I think obviously that’s fantastic.

But you need to look at what kind of mental efforts being put in and if that’s the right thing to be doing. So for example, if somebody says they have a product and there’s an obvious growth market for it. Say that it’s wildly successful in the United States and they’re just starting to do it in Canada and the demographics and the interests and all that are the same and the demands very similar.

Well then yes it’s reasonable to say that that growth can expand and continue into Canada. however just saying that doesn’t alone make it a good investment there needs to be more context and there needs to be cold hard facts and there need to be numbers pulled from the financial statements and data to relate what price are you paying that’s what we talk about when we’re talking about valuations.

Is this company even though it has a bright future is it trading at a great price is the growth they’ve had lately as I’ve been all natural or have they been throwing debt after debt on it just to let it happen if they are thrown debt to make growth happen what happens when interest rates rise?

are you paying up are you may be getting a great deal on earnings but not getting such a great deal on assets or sales or cash is the company has plenty of assets and earnings. But keep such little cash that one bad year could wipe them out these are all different possibilities you really want to think about and it always is going to mean having context and talking on a level playing field which means numbers that are comparable with every sin the stock market out there.

Big basic numbers that we always talk about like profit assets and cash those are things that are no matter what kind of business you’re running those are things that are always going to be characteristic of it and so it’s really the best way to analyze it and it tells you so much more about the picture of a stock and where it could go in the future than to say something that’s so specific to a company.

Such as well their growth is really blowing up internationally or you know profit margins here or the industry trend there those are all great things to know but they’re very secondary and not nearly as important as really getting the big picture and the big numbers and that’s something you need to consider right away and I would argue that they can have a conversation like that straight up at the beginning.

It’s kind of jumping the gun and when you’re a beginner whose getting advice think yes obviously I’m very pro looking at stocks talking about stocks analyzing stocks. But you really need to slow down and build a foundation of basic concepts and really have a system in place before you start dipping in the different stocks and asset classes and all those sorts of things alright.

Another piece of bad advice that we tend to hear a lot you kind of have some investors who like to I like this phrase a lot and I hear used in places other than the investing world. But well you get to cute right where you really try to reinvent the wheel and find ways that you think are going to make a ton of money in the future and in reality it’s kind of just doing too much when you’re kind of missing the huge big picture.

For example, if somebody has some sort of futuristic crystal ball kind of insight that the United States is no longer going to be the place for all your money to be when it comes to the stock market. So that they might talk about well you should invest abroad 100 percent or maybe they have some sort of idea about a certain I don’t know ETF or a certain macro trend that they’re really going to try to take advantage of and so they pour all their capital into that.

It sounds like great ideas and it sounds like it’s giving you an edge but in reality, you need to understand that a way to make money in the market is to be invested in businesses. and so the thing I always like to say I never hear a lot but it helps wash my fears all the time and luckily we’ve had a really strong market lately so I had to do that for myself not counting I guess February and March. Okay I mean maybe this has helped the past couple months but in the grand scheme of things, we haven’t seen anything close to bear market yet.

But the idea that does you think that business will happen tomorrow do you think the business world will be alive tomorrow do you think that money will continue to flow through businesses throughout the future in the next 10, 20, 30, 40 years. I think that answers obviously yes for the majority of us.

And so because we know that fact then we can feel confident that if we are invested in businesses that they will continue to grow and they will continue to be there tomorrow and we won’t lose all of our money because if we’re invested in enough businesses then we know that a majority of businesses will still be around and business will still be flowing so we can feel good about our chances obviously you want to do things like diversify. And because you never know one or two businesses could fall through the cracks and really fail we just saw Toys R Us go under.

You never know but as a general trend business will continue and that’s how games will happen is through these businesses continuing to do their thing over years and years and years and taking profits making profits turning those profits and some more profits and having it just balloon up and really compound over time.

I think it’s important to be able to distinguish between when people are trying to get too cute with their advice if they’re trying to get too complex too early if they try if they’re straying away from some of the basics that we always like to teach. Things like dollar-cost averaging diversification long-term investing and trying to buy stock so they’re generally trading on the margin of safety with emphasis on the safety.

I’m going to save the best one for last just and I think if you’re listening to this and this all sounds like kind of common sense to you I really implore you just listen to the end or I’ll just talk about it now because maybe one of the biggest things I see when I’m online and somebody asks for advice from anybody and a lot of people tend to chime in and they’ll say that you should just buy an index ETF and be and be done with it now  I’m I personally try to buy individual stocks and I talk about it a lot and there are reasons behind why I personally buy individual stocks over ETFs and that those are you know well-thought-out theories and reasons and they’re historical facts behind that this and that and I’m playing to my strengths all these sorts of things.

However, I don’t think that that advice in of itself is bad it is good advice and it can help a lot of people and it’s a way a lot of people should invest. However, there’s a lot of problem with just saying here’s a solution now go away, because while investing has kind of a lot conceptually to digest especially when you’re first starting out.

How you actually behave when things get tough is going to have a much larger impact on your results so if I go back to what I was talking about businesses being around and if you look at something that’s simple as the average S&P; 500 return over the last let’s say 90 years. That’s hovered around nine to ten maybe eleven percent per year depending on what time period you’re looking at but over decades and decades and decades it’s been close to this ten percent a year has been the stock market average return.

The key here is that while you do try the buy low and sell high you try to buy companies that are cheap and sell companies that get expensive nobody’s perfect at it and the key to getting at least ten percent returns is holding on through the long term and that means being invested yes when the market is good but also when the market is bad. Because there’s plenty of studies and you can go through any kind of run some tests yourself and do some numerical experiments and see what will happen.

But if you were only ever invested when the markets in the bull market you would miss a substantial portion of the gains that happen over the decades because a lot of gains happen during a recovery. and you want to be adding more money and buying more stocks when stocks are depressed because those are when they’re at great deals and that they won’t stay depressed forever and so when they finally do pop up it’s usually A, you’ll get a huge return from that and B most people usually aren’t in there yet which is why it’s by definition depressed.

And so a lot of people get in too late and they miss out and that does make up a big portion of returns over the long term so you want to be completely invested you want to hold and you want to hold regardless of whether the markets doing good or if it’s doing bad and so when people don’t get that context or that that kind of lesson in there and we just tell you hey index I just buy and hold like okay cool yeah whatever.

You fast forward maybe 10 years and they see their portfolio drop in half and they don’t understand everything I just said right now such as the market has averaged this much over this amount of time the things I try to say over and over again about the market how it cycles like the seasons and how we have spring summer winter and fall and that’s not like during winter we think there will never be a summer again. Winter still sucks but we know that eventually there will be the summer again and the markets the same way.

There’s all these kind of little things and these little facts and reassurances that I mean yeah I kind of broke it down here and in this little episode but really it’s something that you absorb over time and a little bit here and there can really help you build your resolve during times where you really need to hold your stocks and let them ride out the storm so they can recover when recovery happens. and these bear markets and these tough times that happen for years and I mean even you could argue from 2009 to like 2012 even there in 2012 some people thought the world was going to end they thought governments were going to collapse and there you had the preppers know all these people really freaking out.

And so it’s really hard for people to hang on that long but it’s something that you study the history of the stock market enough you understand how it works you understand how businesses work you understand what earnings mean and what assets mean and how the market works and how economies work all these sorts of things and all these kind of pieces of evidence you can build and really help you stay invested when it matters most.

And it’s just so crucial and there are so many other things that you learn as you go along your way and so that’s why I think investing resources, in general, are so important to be consumed by not only people who are interested in people who want to buy individual stocks. but even the people who want to be passive the people who just want to buy set-and-forget unless they have the extreme discipline or they literally just don’t even care about their money and can just shut that part off of their brain for 40 years.

Chances are you’re going to need at least enough of a base of an education to be able to understand what’s happening with their money how to set up the best system to at least let it go passive and then how to be able to weather the temptation to kind of sell out or try to stray away from these proven principles.

Again I think I’ve hammered it down enough but it’s just something that more people need to hear and I hope that beginners that are getting in are here in this message and they’re not  slaving forty hours a week every year of their life only to watch it what we kind of watch it slip through your fingers when you don’t have just basic financial basic money basic investing advice and how to make your money kind of move forward from that.

Another piece of bad advice I mean this isn’t so much bad advice but maybe it’s a way you can take some good kind of action pieces a little too far I think it’s obvious if you want to create more money for yourself limiting your expenses really helps with that and it gives you more available to be able to invest.

Creating a budget tends to work for a ton of people I know it’s worked for me to open up more money to put into the stock market. problem with the budget is getting into like a budget hell where you might not you know you might squeeze your budget so short that you completely suck any enjoyment out of your life whatsoever. I think a lot of us kind of do this initially when we first get into personal finance I know I certainly did. But I learned over time just chill out relax it’s going to happen well it’s going to be built of eventually and anyways so you got to enjoy the journey along the way.

I think if you make it too restrictive and too kind of gung-ho especially at the beginning that you’re not going to build sustainable habits and you’re not going to see results over the long term. and kind of piggybacking off of that I think something that I know I do and I know a lot of people do as well as they’ll track their net worth on a spreadsheet and I think in general it’s a good thing to do but you just have to be careful not to take it overboard.

Because as the market moves that net worth number that you’re looking at moves as well and so again back to the discussion of well if we hit a bear market if the stock market crashes if it loses 25 to 50 percent now all of a sudden we feel like we’re backtracking instead of moving forward. When in reality if you’re doing the things we talk about your dollar cost averaging you’re buying shares every month your wealth is actually growing you just can’t see it right now but you’re accumulating more assets you’re accumulating more pieces of these businesses you’re growing your business portfolio.

So to say and so you’re growing invisible wealth but on paper, it looks like you’re losing and that can be really disheartening and it could make you do something extreme it could make you quit could do any of those sorts of things.

I think it’s are important to if you’re going to track your net worth making sure you understand this key concept that it’s only helpful to a degree and I’d say it’s much more helpful at showing you how you’re paying off debt rather than like how much money you actually have. And I think folk putting more of a focus on accumulating assets rather than watching your balances grow is really key if you want to put your mind at ease when it comes to being on this financial freedom path.

I guess the last piece of advice so kind of dispel in the way on this episode is I guess just be careful when you meet the people who are really rah-rah market rah-rah like the kind of typical stereotypical Wall Street follows the tickers knows all the technical terms has a lot of charts in their life right and really kind of lives in peruse the market and I’m really studies of the market.

They probably can make a lot of money maybe they do but when you talk about all the principles that we always hammer down on the podcast when you talk about being part owner of a business and again building that business portfolio.

You really don’t care what happens in the market too much and I think it’s easy to be kind of suckered into the whole game of the stock market and there’s more there’s much more to the stock market than what the stock market presents on the surface.

It seems to present things that you hear about on CNBC and things I can really start to make you feel like you don’t have a chance that you can compete you have these algorithms now there are these computers are they’re trading and they’re doing it automatically and they’re manipulative a vantage of volume and like getting little half percent’s of a penny and arbitrage and then doing those sorts of deals just millions of times to make a little bit of money.

And then you have a lot of people who like to claim that they can I don’t know why it’s still so prevalent but you always have people who like to make these price targets you know there’s a price target for this stock there’s a price target for Bitcoin there’s a price target for the market and it’s just so ridiculous especially when you’re talking about the stock market of the whole. If you’re talking about the S&P; 500 you’re talking about the Dow.

I don’t like to put people on blast like individually but ones particularly coming to my mind where he’s written books calling this about the Dow calling that number on the down and just been completely and utterly wrong. I think he got maybe one out of five predictions right and now he thinks he’s like the smartest guy alive and you got some publicity after that. But there’s just so many people like that and there’s so many just so much focus on the wrong things.

Yeah the stock market creates liquidity it’s a place where a lot of money flows in and out very quickly on the day-to-day basis it’s very exciting there are ringing bells there are flashing tickers all these sorts of things. But at the end of the day at its very core, it is a marketplace and it is comprised of businesses that are actually making money in the real world aside from the whole Wall Street financial kind of make money off commissions and make money by moving money and all these things.

There are actual money actual businesses doing real things that matter in the world and so when we approach it that way then we can really do a better job at picking the right stocks and picking the right businesses that are doing well. On when you look at the business and they’re doing well from a business perspective rather than just a share price perspective.

And that’s huge and I think that really helps you and that’s kind of like the next logical step in what we’re talking about today is taking this bad advice turning it into good advice and maybe going the next step into adding principles and fundamentals and things that investors over and over and over again I’ve used over the years and decades to create wealth. Doing that and then again navigating through the weeds and filtering out the bad noise and finding the good parts of the stock market and finding the businesses that will continue to pay you parts of their profits for years and years and years and that will grow and as the business grows you will grow and that’s how you’ll make money.

Keep those things in mind really try to take everything that comes at you with a grain of salt try to get the perspective of the person who’s talking to you what is their perspective whether their experience is what they’re saying makes sense or does it just sound nice. And avoid the ones that we talked about today and now you know how to avoid them why to avoid them and you can go save all your friends and family too.

All right well that’s going to wrap us up this week I hope it was helpful and hopefully you learned something and hopefully you’re going to be pushed in the right direction that’s going to push you forward on your path to financial freedom.

You can always check us out online Dave and I are on Twitter we have our email lists obviously you can read the show notes if you need to leave a comment if you want on the show notes investing for beginners.com/podcast. Actually had a nice comment on one of our recent episodes and he talked about but just kind of I want to share what he said because it was kind of cool to hear some of the takeaways he had from the show and kind of where he’s along his journey and it’s something that you can maybe apply for yourself.

I mean for one he’s talking about how he’s reading One Up on Wall Street by Peter Lynch which I’m currently reading to and it’s a fantastic book and it’s really short and it’s a great intro to the markets.

It’s from Ed he goes “Hi I’ve been listening to your podcast for a while now but never took the opportunity to subscribe to your mailing list but I just subscribed today I can tell you really I can tell you I really enjoyed this last podcast I’m new to investing in very small positions but learning something new every single day. At first as new investors, we don’t understand how this works and we want profits fast and consistently without putting the time or the effort to understand how the market works. I can relate to Andrews opinion to take profit and forget about the stock not get attached. As Peter Lynch would say the stock doesn’t even know you owned it thanks for your knowledge and keep it up.”

Well, thank you, Ed, if anybody else wants to leave a comment feel free I know I love to reply to you guys and talk to you guys on there and hear your thoughts from these podcast episodes and Ed summed it up really nicely. He said we all want profits fast without putting in the time and effort to understand how the market works and so something we should all try not to do because it’s even if you do get the profits it could be very unsustainable and you probably won’t have nice long-term results from it.

Go out there get more knowledge buy some stocks grow your wealth invest with a margin of safety emphasis on the safety and we’ll talk to you guys next time.