Pimp Your Finances

It happens with every swing of the economy: someone proclaims “the rules have changed!”  But have they ever really changed? Is this time any different?

Jeffery Kosnett at Kiplinger thinks so. He wrote an article called 10 Financial Myths Busted, where he describes 10 financial rules that were disproved by the recent crash.

I’m going to give you his list, along with my explanations and thoughts about whether anything has changed or not.

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Myth 1: There’s always a hot market somewhere

In the past, it was thought that investments in places like Asia and Russia could prosper even if the US market was in the tank. There’s no way that everyone and everything can crash at once, right?

This time around, the whole world is doing just as bad as we are. Rather than disproving anything, I think the downturn just shows the importance of diversification, even if portfolios are generally down across the board.

Myth 2: Real estate behaves differently from other investments

When real estate kept climbing even thought the dot-com bust, many people thought that real estate acted independently of other financial investments, and could only keep growing. Boy, were they ever wrong.

Real estate and mortgages turned out to be the spark that bled, and took down the entire economy with it. It was a classic investment bubble, and showed that real estate plays by the same rules as anyone else (and may not even be as good of an investment as stocks).

Myth 3: Reliable dividend payers are safer than stocks

I’ll be honest and admit that I don’t own any individual stocks, let alone dividend payers. But the myth goes that some stocks with mediocre performance are worth keeping because you could always count on them to generate income. The current economy has changed that, and many companies are slashing their dividends.

Myth 4: Foreign investors can drain the economy overnight.

The author says that despite foreign investors holding $3.1 trillion of US Treasury debt, they can’t have an impact on our economy.

I’m either confused or paranoid, because that does seem like a potential threat to our economy and security. I’m not trying to say we should be xenophobes and cut off the rest of the world, but we should be aware of the impact that others could have on our economy.

Also, the fact that foreign investors haven’t sold US debt doesn’t prove anything. The author acknowledged that the entire world economy is in the crapper in the first myth, so where else are they going to go?

Myth 5: Gold is the best place to hide in a global economy

In early February, an ounce of gold traded for $910. That’s just where it sat a year ago, when world economies weren’t so bad off.

Gold has performed better than other types of investments recently, but typically does worse when times are tough. There is increased demand as an investment, as people look for protection against inflation. On the other hand, there is less demand and a greater supply for gold right now. Not only are people buying less gold in the form of jewelry, but many people are selling the jewelry they do have.

Myth 6: Life insurance is not a good investment

I strongly disagree with this one.

I acknowledge the importance of life insurance – I hold some myself. But it’s not an investment. It’s protection in case I die.

The author touts the benefits of life insurance, saying that the guaranteed payouts are enough to offset the higher expenses that go along with investing through insurance. If that wasn’t enough, he asks:

Have you checked your 401K recently?

I have a rebuttal.

Have you checked the interest rate on ING online savings recently? It’s been performing better than my 401K.

That doesn’t mean that you should put all your money in online savings. You’d actually lose money over the long run, as ING’s interest isn’t even keeping par with inflation recently.

Why do you need an additional middle man for your investments? If you want to invest in stocks or bonds, do it through an investment company. Not through your insurance.

Myth 7: The economic downturn dooms the dollar to irrelevance.

Normally when a country goes deeper into debt, it’s currency is worth less. But the dollar has actually been holding it’s own recently. Why is that?

There’s not many other places to go, and in spite of our massive national debt, the Treasury has never defaulted. Plus some foreign currencies were temporarily inflated by oil and commodities speculation.

Myth 8: Mass layoffs reward investors

Some people think that stocks go up when the number of employees goes down. It’s not always the case. Allstate stock lost 21% when they laid off 1000 employees – roughly 1.4% of it’s workforce.

Getting rid of people could show that you’re cutting costs and becoming a stronger, leaner company. Or it could signal that the bottom is about to drop out.

The bottom line? There’s no way to know what it means when pink slips are handed out.

Myth 9: It’s crucial to diversify a stock portfolio by investing style

This one is about the difference between growth and value stocks.

Growth refers to companies with expanding sales and profits. Value describes stocks selling for less than the the business is worth.

In a market where everything is down, it’s hard to tell what is what. According to the author, diversification is still important to any portfolio, but right now it’s not as useful to try to classify companies according to their style.

I don’t think that this myth – or any diversification rules – have been busted by the recent economy. It’s just as importance as ever to diversify.

Myth 10: A near perfect credit score will get you the best rate

This is another area where I strongly disagree with the author.

He’s trying to downplay the importance of a credit score, but that’s a load of rubbish. He can’t even come up with good examples:

Mortgage lenders prefer large down payments. Credit-card issuers are just as apt to reduce your credit line or raise your interest rate. And those 0% car loans? Often they last for only three years.

Again, that’s rubbish. He couldn’t even close list with a strong point.

Having a good credit score isn’t everything, but it gets you a heck of a lot further than anything else will. It’s normally the biggest determining factor for the interest rate for any debt you’ll take on.

I don’t get why the author is downplaying the importance of credit scores.

My take?

The more things change, the more they stay the same.

To tell the truth, I don’t think any of the myths about economics or investing have changed. If anything, the bubble has finally popped, so people are returning to the rules they should have followed all along.

What’s your opinion? Have the rules finally changed?