MOST financial advice is neither good nor bad: its usefulness simply depends on someone’s tastes, budgets and risk appetite.
But there is also a class of genuinely unsound financial advice, which no one – rich nor poor, risk averse nor risk loving – should follow.
Below are the most gruesome ones:
The biggest mistake is to be convinced that bigger risks mean bigger returns, just like a higher price mistakenly implies a better quality.
Even though it is true every now and then, it is often false: high risk is not a reliable indicator of large returns. Just as high fees are not an indicator that your investment professional will achieve a better performance, just that the service is expensive. If only it were that simple.
Tip: Invest in a highly diversified, passive portfolio across industries, assets, geographies and time.
Even more tempting is to be seduced by the intuition that past performance is a reliable basis for future investment.
The fact that a company or fund performed well in the past three years says absolutely nothing about whether it will be able to persistently show above-average performance in the next 3 years. Most actively managed funds show returns that perfectly match randomness.
Additionally, a survivor bias is at play, past performance is often tweaked by adjusting time horizons and advertising is focused on funds with the best past performance. The factor of luck is greatly misunderstood and underestimated by professional and amateur investors alike.
Tip: focus on fundamentals and don’t try to beat the market.
It is often thought that money spent on home improvements is earned back as it will increase the value and price against which a house can be sold.
This is only true in a very limited sense for certain fundamental home improvement projects, such as maintenance and repair done shortly before the sale.
Other investments will quickly depreciate in value as you make daily use of them such as kitchen and bathroom fixtures, and as tastes and preferences for designs will differ between the owner and potential buyers.
Tip: If you are keen to sell your house, simply cleaning up and throwing as much stuff away as possible might be the best investment.
Nothing is as unpredictable as the future: you may think co-signing a loan or being a guarantor is just a formality that helps your partner or friend. However, it can have very real and devastating consequences.
Many people think they run the risk of being responsible for 50% of the loan, but you will be liable for the full debt if the primary lender defaults.
Ask yourself what the loan will be used for? Will it create returns or retain its value? Will your friendship be strong throughout the duration of the loan?
Tip: Practice extreme restraint when volunteering to co-sign a loan or becoming a guarantor.
Many financially illiterate people focus on monthly payments. They know their income and see what they can afford to pay in monthly instalments.
However, this overlooks the cost of interest rates and monthly instalments can very easily be lowered by simply increasing the duration of the loan.
Before you know it, you end up paying as much in interest as the principal amount you borrowed and you will continue to make payments long after the purpose of the loan has expired.
Tip: focus on interest rates and loan duration, not monthly instalments.
There are credit cards out there in Malaysia which either reward you with a rebate on your interest payments or that make the receipt of cashback conditional on having a minimum amount outstanding.
The 18% annual interest rate you are most likely paying is much more than the rebate the bank is giving you: you are effectively financing your own reward.
People who keep an outstanding amount on their credit card are called “revolvers” and are the bank's favourite suckers.
Be a “transactor” instead: a person who pays his or her credit card balance in full, every month.
Tip: Ignore any type of rebates on outstanding credit card balance, you are better off paying it off as soon as possible, as there is no risk-free 18% asset you could invest in alternatively.
Mark Reijman is co-founder and managing director of https://www.comparehero.my/ dedicated to increasing financial literacy and to help you save time and money by comparing all credit cards, personal loans and broadband plans in Malaysia.
Limited time offer:
Just RM5 per month.
