There is a myth out there, sometimes propagated by some mainstream financial media, that there are simple shortcuts for wealth creation. That’s simply not true. Now there are some schemes out there that are pure fiction, but that’s not what I am talking about here.
I’m talking about ideas that are solid for what they are, but with the telling of them, they gain larger-than-life status until eventually, some people believe they are something that they are not. And what they are not is some magic wand that, with a mere wave, makes all good things come true.
Some financial publications would have you believe that if you follow some simplistic formula, all will be well. Unfortunately, the financial world is seldom so clear-cut that simplistic formulas have much utility. The bottom line is that, despite all those magazine articles claiming an easy path to riches, there is no secret formula or other shortcuts to financial success.
There have been several investment ideas suggested as easily implemented, can’t miss solutions. In the last few years index funds, exchange-traded funds, income trusts, and dividends have all had their cult followings. Sure, these ideas are fine for what they are, but they are certainly not a miracle cure-all that will solve all problems.
There is nothing intrinsically wrong with any of these things, mind you. The trouble can come from the false sense of security that accompanies some pundit’s endorsement, and the potential misapplication of the idea. Bad things can happen if you take an idea, even a good idea, out of context. Even something as normal and natural as oxygen can be a bad thing in the wrong circumstance. Just introduce oxygen to a fire and you’ll see what I mean.
For example, since recently dividend-paying funds were the investment that was fashionable with the miracle cure crowd. Again, there is nothing wrong with the idea of receiving dividends on your investments. In fact, a nice dividend yield is a very favorable attribute for an investment. But it remains just one part of the big picture. Simply paying a dividend won’t make a stock or fund the right investment for all people.
Lately, mutual funds have been paying attractive dividends that have had their NAV prices come down significantly. As an example, you could take a look at just about some of the Balance funds, for which we’re giving a 1% dividend every month consistently but have seen their NAV prices get chopped in half. Getting a healthy dividend is great, but that benefit will be dwarfed if your investment is suddenly worth half as much.
I don’t even mind too much that but many times, people were sold funds showing only the dividends. Over time, dividends can be a significant part of an investment’s total return. It’s just that the dividend itself doesn’t guarantee a successful outcome.
I think an idea that has even more of a potential for inappropriate use is the apparent fascination with taking shortcuts in constructing an investment portfolio.
Many times a read about the wonderful idea of just taking big term insurance and putting all the balance money in mutual fund SIPs instead of going for cash value investments.
The idea behind this advice sounds great as people can cover themselves maximum through term insurance in minimum premium and they can generate better returns through mutual fund SIP in long term say more than 10 years. Except …
What about the statistics that more than 33% of term insurance lapses mid-way as we people don’t like to put our money when it seems to not generating any return !! The same way mutual fund SIP generates good returns in more than 10 years, but statistics show only 2% of people reach 10 years continuous investing in any SIP !! Think about 98% who stop or take out the money in between to fund their fancy vacation, car, home renovation, etc, or stop it due to emotions during market downturns! Sound in theory but lousy result in practical life.
Often these types of quick-fix proposals suggest that the low-cost nature is a competitive advantage like buying online. To which I say, when you look at your total all-in costs, is it really cheaper in the first place? Often a person will be surprised at just how much they are paying for their “low cost” idea. But perhaps more importantly, when are people going to realize that cheap isn’t a synonym for good? I can drink cheap wine, but that doesn’t make it good for me.
Unfortunately, you won’t see these types of journalists writing a column that says “Listen, friend, you’ve got some talents, but for the most part, you don’t cut your own hair, fix your own teeth, perform your own surgery, represent yourself in legal actions, repair your own microwave, replace your own water pipeline or cut your own dangerous trees. So why do you think that you can plan your own finances?”Sure exceptional people can do it. Chances are, that’s not you. Go see a professional. Be aware that, just like not all barbers, dentists, doctors, lawyers, mechanics, plumbers, and tree-fallers are world-class, not everyone who calls themselves a financial planner is exceptional. These are the 7 steps financial planning process. It’s a good starting spot to help you figure out whom you should hire to plan your finances. That way you can focus on the stuff that you are good at.”
A column like that wouldn’t sell magazines though. So the myth that investing is easy and can be competently done by amateurs in minutes continues to be perpetuated.
