Throughout my years of working with and managing peoples financial matters I have fielded many questions related to finance. Surprisingly, many of the questions and concerns people have are similar. Here are the top 10 questions/statements I hear and my response to each.
1. “Putting my money in the stock market is like gambling.”
Really? If you went to the casino everyday for 70 years, your money would have grown an average of 12% a year? I don’t think so. The S&P 500 had average returns of 12.17% from 1926 to 2007. Sure we are in a down cycle now but give it a little time and you will wish you were invested in stocks.
2. “Why should I buy bonds, they are so boring?”
Bonds have had positive returns in each of the last 9 years, even before interest payments are added and bonds have beaten stocks in 5 of the last 9 years. If you add in the yield, bonds have outperformed stocks in 6 of 9 years. Everyone should own bonds in their portfolio because they help your portfolio with steady returns.
3. “Even though the individual stocks I own are down 60 to 70%, why should I sell?”
It is hard to admit your decisions were wrong but they were. The stocks you own are crap and you shouldn’t wait to see if they turn around. Take advantage of the tax losses, which you can use to offset future gains and put together a portfolio that is less likely to have huge losses.
4. “I plan on putting all this extra cash (equity) from selling my house into a down payment on my next house.”
Locking up all your cash in an illiquid asset like a house is a bad idea because you should have access to a certain amount of cash for when times get tough or an unforeseen event happens. Plus, the government provides a huge deduction for mortgage interest, which effectively lowers your interest rate therefore giving you the potential to earn higher returns in other assets when you invest that money.
5. “I put all my money back into my business.”
Again, a business is illiquid and though putting some of your earnings back into it is wise, some of the money should be invested in a diversified mix of assets including equities, bonds, and cash. This will give you flexibility in later years if you want to slow down but not yet sell, the timing to sell is not favorable, or your business is no longer viable or relevant.
6. “What do you think the market is going to do?”
I honestly don’t know and anyone who says they do is a liar and you should not listen to them.
7. “Are you like Bernie Madoff?”
No. I use an unaffiliated third party custodian to transact trades and hold all client money and securities. No client money is held in my name or my company’s name.
8. “I only invest in real estate, it never goes to $0.”
True, land has not gone to $0. But real estate is not the be all end all asset. A lot of people thought home prices would continue to climb 20% forever and there was no risk to building more and more homes. Again, liquidity and diversification is important and as we are experiencing real estate is not a sure thing.
9. “What do you think about xyz stock?”
Individual stocks are a hard to evaluate and determine the level of risk in one company. No one thought GE would fall 70% in the last year or that the largest banks in the world would need billions from the government to survive. In order to limit the risk you are taking with your money buy diversified funds spread out among many asset classes.
10. “I want to live life and not worry about saving.”
Instead of looking to the government or other family members to pay your bills in retirement you should be taking the responsibility yourself. Say you save $1,000 each year for the next 40 years instead of buying a whole new wardrobe or going out to eat 3 days a week. That $40,000 (40 years times $1,000) will grow to $487,852 if you have average investment returns of 10% a year. Denying yourself little pleasures now and saving for long periods of time will allow you to accumulate wealth so you may live a rich life in the future.