Myths, the late Joseph Campbell taught us, are fundamental truths that help people carve order out of chaos. But in personal finance, myths are often fundamentally false. Yet, most of us cling for years to financial misconceptions, fantasies and half-truths, merrily unaware that they're, well, myths.
To help shine the light of truth on some financial fictions, staffers at USA TODAY selected 10 of the most common myths about personal finance. We explain why each is untrue. And for each myth, we reveal the reality and suggest a better path to financial security.
Myth: The more I know about investments, the less likely I am to fall for scams.
Reality:A study by Wise & Healthy Aging, funded by the Finra Investor Education Foundation, found the opposite was true for investors 60 and older who fell prey to fraud. Victims tended to be more financially literate than non-victims. Why? Possibly because victims are often knowledgeable enough to feel confident about investing — but not enough to detect inappropriate products or outright scams, says Grace Cheng Braun, chief executive of Wise & Healthy Aging.
While no research is available for investors of other ages, the same pattern likely holds true, since a little investment knowledge tends to lull many people into overconfidence about their investment know-how, Braun says. Investors should check with state and federal regulators about the legitimacy of an adviser or financial product before investing.
Myth: Your fund's performance is the main factor in the growth of a retirement account.
Reality:Not so. And your fund's performance is the one factor over which you have the least control. The best way to increase your retirement kitty is more elementary: Save more.
Let's say you earn $50,000 a year and save 5% of your salary annually. Each year, you get a 4% raise. If your fund earns 10% a year, you'll have $651,000 in 30 years. Sure, stocks have typically earned 10% or more a year in the very long term. But the long term includes vast stretches of poor performance. If you really need $651,000 to retire, you shouldn't bank on a 10% annual return.
Better to assume a smaller return and save more. Say you earn the same pay, but this time save 10% of it. Your fund, alas, earns just 6% a year. Yet, after 30 years, you'll have generated $663,000. And if your fund really does earn 10% a year, you'll have $1.3 million.
Set savings goals rather than trying to pick the next hot fund, says Dan Makin, financial advisor for the Professional Planning Group in Westerly, R.I. "If you pick the wrong fund, you can get really hurt."
Myth: Dollar-cost averaging boosts returns.
Reality:There's certainly nothing wrong with dollar-cost averaging; it involves investing an identical amount into a mutual fund at regular intervals. But that strategy won't necessarily deliver superior returns in the long run.
With dollar-cost averaging, you'll automatically buy more shares when a fund's share price is low and fewer when the share price is high. That serves you well.
But the stock market rises more often than it falls. If you have a lump sum to invest, you'll generally earn more money if you invest the entire amount at the beginning of a period, rather than bit by bit.