Junk these financial myths in 2016

A new year is just round the corner and this is normally a time for great joy and cheer. Families and friends come together at this time, happiness is shared and life feels good, despite all the problems that we face otherwise. It is also a time when great resolutions are made, some which are followed up through the next year and many which are unfortunately forgotten. I think it will be a good idea to do a series this week on how to invest in 2016, in the different asset classes.

However, prior to this I wanted to list out some investment myths which are injurious to your financial health. Like all myths, these have got created over a period of time due to a variety of reasons. Firstly, there are vested interests which want to promote their products or services. Secondly many bloggers and Facebook posts repeat things without really understanding what the actual implications are. Thirdly, people who invest in these products or services become fiercely loyal to these due to the endowment effect and try to shout down anyone who says anything that is contrary to the accepted belief.

In the last 6 months I have written about many of these myths and I will not explain these here. If you are interested in knowing more about them go through my blog to learn more. I will simply point out the myths here and ask you to junk them in the year 2016. Our conceptual flaws get reflected in our investment actions and that is a bad thing as far as your financial life is concerned. So on to the myths now:-

  • Equity returns compound – sorry, they simply do not no matter how many people tell you that they do.
  • Direct stocks are risky – well, they are as risky as any equity MF as they invest in the same underlying assets.
  • Balanced MF are ideal investment – they are not, you must ideally keep your equity and debt portfolios separate.
  • SIP is the best way to invest in MF – except in a continuously declining market, there are far better ways to invest in MF.
  • PPF is an old and stodgy product – in the debt universe there is no better product and this can be used in many innovative ways.
  • You should have separate portfolios for each goal – this one is a seriously bad idea, it increases clutter and your returns are going to be sub-optimal.
  • Tax free bonds are bad investment – clearly people know better than self proclaimed experts as the NHAI issue got oversubscribed in 3 hours!! For people looking at regular income, these are ideal.
  • Mid cap and small cap funds should be avoided – another bogey and a bad one too. These funds have given and are likely to give higher returns as compared to diversified equity funds, albeit with volatility.
  • Home loan is a good loan – no loans are good as you end up paying huge interest. Take a loan if you must but pay it off as soon as you can, that is the only sensible way of dealing with it.
  • Keep home loan going because of tax savings – silliest idea I have heard in life, just do a cash flow analysis and you will see why.

There are, of course, many more myths but these are the ones you need to junk first. I will be happy to discuss more on these but only after you have read the relevant blog posts and understand my viewpoint. Believe me your financial life will be a whole lot better after you get rid of these myths and decide to do nothing with them in the future.

In my next post I will look at things more positively and start the series I talked about in the beginning of this post.

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4 thoughts on “Junk these financial myths in 2016

  1. You should have separate portfolios for each goal – since the time horizon vary for each goal, appropriate products meeting the time horizon dimension can be opted for – I think that is the logic behind this rule. You also suggested, on these lines, to leave the equity portfolio to grow for use till the 3rd decade of retirement.

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  2. Completely agree with you on all points. I had the same view as you about SIP but didn’t know who to validate my thoughts with for fear of sounding stupid!! Glad you put it in words explaining it further.

    The all-time silliest one is continuing a home loan for tax benefits even though one can pay it off completely! Completely baffles me why people don’t work out the maths of it all?

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