In the world of investing, it's easy to get caught up in the latest trends and advice, but not all of it is created equal. While some investment wisdom holds true, there are several pieces of advice that may be doing more harm than good. Let's take a closer look at some of the investment tips that you might want to ignore, or at least approach with a critical eye.
Buy what you know
The idea that you should invest in companies you're familiar with is a common piece of advice. However, Dean Anderson, founder of Kernel, warns against taking this too literally. While it's true that knowing a company can give you some insight, it can also lead to a situation where you're over-invested in big-name brands. Anderson points out that people who bought shares in Air New Zealand post-Covid may have experienced the negative effects of this, as share prices dropped. In my opinion, this advice can simplify the investment process too much and send people down the wrong pathway. It's easy to get caught up in the excitement of a familiar brand, but it's important to remember that brand recognition doesn't necessarily make an investment a good one.
Thinking of your home as your most important investment
New Zealanders tend to focus on property as an investment, but University of Auckland associate professor of finance Gertjan Verdickt warns against treating your home as your most important investment. While homeownership can be good for some people, there's not much evidence that buying is financially superior to renting and investing the difference. Verdickt points out that an owner-occupied home isn't really a home at all because it doesn't give you a significant income and if you sold it, you'd still need to pay to live elsewhere. In my view, this advice is often treated as a can't-miss investment, while academics note it's often not a great financial investment and can create dangerous concentration of wealth in a single illiquid asset. Personally, I think it's important to be wary of the investment you're making in the home you live in, and to consider the broader financial implications.
Save 10 percent to 15 percent of your income at every age
The idea that you should save 10 percent to 15 percent of your income at every age is a common piece of advice. However, Verdickt points out that economists would argue that you should smooth consumption over time, not your saving rate. This typically means low or even negative savings when young when income is low, high savings in midlife, and spending down in retirement. The constant savings rate advice ignores life-cycle income patterns and the time value of money in a way that's economically suboptimal. From my perspective, this advice can be too simplistic and doesn't take into account the unique financial circumstances of different age groups. It's important to consider the broader financial implications and to tailor your savings strategy to your individual needs.
Keep emergency savings even when you're carrying credit card debt
The idea that you should keep emergency savings even when you're carrying credit card debt is a common piece of advice. However, Verdickt points out that it may not make sense to build up your emergency savings account until you've cleared your expensive debt. It's economically irrational given the interest rate spread. You'd be better off paying down the high-interest debt and using available credit if needed. In my opinion, this advice can be too one-size-fits-all and doesn't take into account the unique financial circumstances of different individuals. It's important to consider the broader financial implications and to tailor your emergency savings strategy to your individual needs.
Timing the market
The idea that you should time the market and jump in or out based on headlines or short-term movements is a common piece of advice. However, Ana-Marie Lockyer, chief executive of Pie Funds, warns against doing this. She points out that it's very difficult to get right consistently, and often people end up missing the best days of the market, which can have a big impact on long-term returns. In my view, this advice can be too reactive and doesn't take into account the broader financial implications. It's important to consider the broader financial implications and to tailor your investment strategy to your individual needs.
Don't look for quick wins
The idea that you should look for quick wins and short-term gains is a common piece of advice. However, Lockyer points out that investing tends to work best when it's boring and consistent - diversified, long-term, and aligned with your goals. The key is to take a step back from the noise, focus on a strategy that suits your timeframe, and stick with it rather than reacting to every market update. In my opinion, this advice can be too simplistic and doesn't take into account the unique financial circumstances of different individuals. It's important to consider the broader financial implications and to tailor your investment strategy to your individual needs.
In conclusion, while some investment wisdom holds true, there are several pieces of advice that may be doing more harm than good. It's important to approach investment advice with a critical eye and to consider the broader financial implications. By doing so, you can make informed decisions that are tailored to your individual needs and goals.
