Ben Felix, PWL Capital portfolio manager and personal finance YouTuber, recently laid out some of the biggest personal finance myths.
These myths challenge conventional strategies and best practices, offering a good opportunity to assess what truly works. Some of these myths center around investments, while others gravitate toward how you spend your money.
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Felix came up with 10 myths in the video, and these were five of the biggest ones.
1. Save as Much as You Can for Compound Growth
Compound growth is good, and you should save money each month if you can. Retirement account contributions are still a good way to build wealth. However, compounding can go too far.
Felix points out that spending extra money in your 20s instead of squirreling it away in a brokerage account can substantially increase your quality of life. You can end up in a better neighborhood, buy a more reliable car or have great memories by going on a vacation.
Spending extra money in your 40s won’t yield as much as it can in your 20s from a lifestyle perspective. You may not have the same flexibility or energy to travel, and people in their 40s are less likely to move, especially if they have young children who are getting used to the area.
Your skills and income gradually increase as you get older, so it will be easier to compound wealth later in life. It’s still good to save money and build wealth in your 20s, but you don’t have to throw every available dollar into assets.
2. Dividends Explain 40% of Stock Market Returns
The second personal finance myth is that dividends explain 40% of stock market returns. It’s a metric dividend investors bring up to justify buying dividend-paying companies and ignoring companies that do not give cash to their investors each quarter.
Felix points out that dividends reduce the capital value of the stock that you own. If a company gives out a $1 dividend per share, its stock price will go down by $1. Dividends do not explain or deliver stock market returns. Felix asserts that dividends describe returns. Companies would maintain their returns regardless of whether they gave out dividends or not, but some corporations choose to distribute a portion of retained earnings to investors.
3. Bonds and Cash Are Safe Investments
Bonds and cash are less volatile than stocks, and Felix acknowledges that point. However, these same assets do not keep up with inflation in the long run. Furthermore, the money you put into bonds and cash could have been allocated into an asset that produced compelling long-term returns.
Bonds and cash have their place in many portfolios, especially for retirees who need a cash buffer so they don’t have to sell stocks during corrections. However, stocks can dramatically outperform bonds in short timeframes and offer retirees more financial flexibility than if they just put everything in cash.
4. Renting a Home Is Throwing Money Away
Felix has often spoken against this myth. The common argument is that rent is throwing money away since you’re not building equity. Eventually, mortgage payments translate into a fully paid-off home and minimize your housing costs moving forward.
However, renting can be the cost-effective move after accounting for property taxes, maintenance costs, depreciation, and surprise expenses. You also don’t have to put up a down payment and can invest your extra capital into stocks and other assets that can outperform housing returns. Renting also provides more flexibility. You can move somewhere else when your lease expires, but it is a lot more difficult to sell a home that you own.
5. Debt Is Always a Bad Thing To Have
Felix is against consumer debt, especially credit card debt. However, he believes some type of debt can be productive and move you closer to long-term wealth. A low-rate mortgage gives you time to borrow capital and use extra funds to build your portfolio.
He’s even an advocate for using some margin in stock portfolios, viewing it as an opportunity to boost total returns. However, there are risks involved with this strategy, especially if you take on too much margin at once, and the interest rate on margin debt heavily influences whether it is an idea worth considering.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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