“Cash Is King” and 6 Other Personal Finance Rules We Hate – Robb Report
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Investors are bombarded with financial advice. Personal finance publications and websites, media, podcasts, broadcast personalities, and even well-meaning friends are prolific sources of financial wisdom. The advice ranges from clever and actionable to downright dangerous, but there are some old saws we hear time and time again. Even experienced investors sometimes rely on maxims that are no longer relevant in today’s investment climate.
Let’s revisit some common principles that make it time to retire.
Money is king
While it is always prudent to keep cash to meet current spending needs, uninvested assets do not generate a return.
“It pays to be fully invested, because over the long term, stocks outperform bonds and liquidity,” says Ilka Gregory, head of client relations at Truvvo Partners, a New York-based wealth advisory firm that deals with ultra-high net wealth. individuals (UHNWI).
It is essential to determine the appropriate asset allocation based on investment objectives, risk tolerance and liquidity needs. She notes that “although some investors may have an appetite for opportunistic investments, deploying cash reserves for such investments requires market timing, which is difficult and difficult to do well on a consistent basis. The best way to maximize returns on investment is to be fully invested in a global portfolio diversified across multiple asset classes. “
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Debt is bad and should be avoided
Many investors have a distorted view of debt and fail to realize that it is a tool that can be used effectively. Of course, too much debt is risky, and it is never wise to take on more debt than you can comfortably repay. However, judicious use of debt can be beneficial, especially when interest rates are low.
With mortgage rates around 3% in today’s environment, taking on modest debt can be a good idea even if you are able to buy a home with cash. This is a great way to free up funds for other projects, like renovations, for example, and to avoid locking money into a single asset. Mortgage interest also remains tax deductible in most cases, which allows for lower taxes payable while enjoying greater financial flexibility. The money freed up by taking out a mortgage can also be invested in other assets that generate a return.
Alternative assets are unacceptably risky
Hedge funds, private equity, and real estate are all considered alternative assets, with investment generally limited to accredited investors who must meet certain income and equity requirements. Although these investments are often complicated and can be less liquid, this does not necessarily mean that they are riskier.
A private equity investment, for example, may be subject to a lock-in period. This allows a private equity fund to take a more strategic, longer-term approach and potentially create added value.
Private equity investors take an active approach to portfolio investing, creating value by participating in management and governance while providing financial and operational expertise. Investors who can afford the loss of liquidity often benefit, as private equity has outperformed stock markets with a similar level of risk. Additionally, adding alternatives to an investment portfolio can add diversification, thereby reducing risk, while increasing return.
Invest for income alone
Many investors focus on generating income from interest and dividends. This becomes particularly difficult in a low interest rate environment. In addition, investors can limit themselves by favoring stocks that offer higher dividends over those with greater growth potential.
Total return, including income and appreciation, is a more robust measure. By focusing on total return, investors can smooth and increase their income stream while increasing overall performance, even in the face of market fluctuations.
“The whole portfolio is the engine to generate returns, taking into account interest, dividends, distributions and capital gains, while allowing you to optimize the portfolio regardless of the return,” explains Gregory of Truvvo,
ESG investing involves higher risk and lower returns
Notions that socially responsible investing can compromise portfolio performance or involve a higher level of risk are erroneous. Companies that implement environmental, social and governance (ESG) investments frequently outperform less forward-thinking companies and benefit from greater profitability. As with any investment, investors should consider each ESG opportunity on its individual merits and perform appropriate due diligence.
Use multiple financial advisors to improve diversification
While allocating assets to a wide range of funds improves diversification, working with multiple advisors can create significant problems, especially when the left hand doesn’t know what the right is doing. Every client, especially UHNWIs, needs unified oversight to ensure that all investing activity is achieving desired goals. Without such oversight, the inability of advisers to coordinate with each other can lead to tax issues, conflicting strategies, and an inability to manage capital gains. The investor can also end up paying a lot more in fees for little or no gain.
Dominant wisdom is not written in stones
There are many investment principles that are immutable, such as the relationship between risk and return or the fact that diversification has been proven to reduce risk. But there are many commonly accepted maxims that are not. It is worth examining the dominant investment philosophies and reconsidering how entrenched ideas can no longer be used to maximize returns and achieve investment goals.
With that in mind, maybe now is the time to strike up a conversation with your financial advisor and think about ways to improve your investment results.