Apr 25 2014, 5:32pm CDT | by Forbes
Financial services powerhouse Charles Schwab surveyed 998 people to uncover their biggest money misconceptions. More than half of those surveyed described themselves as savvy when it comes to their personal finances, but a staggering number of them agreed with nine money myths identified by Schwab.
“People want to make good decisions about money and many believe they’re on the right track with their finances, but often they just don’t know what they don’t know,” says Carrie Schwab-Pomerantz, senior vice president at the company and president of the financial education focused Schwab Foundation. Surprisingly the 52% who identified as “savvy” were more likely than others to agree with the money myths. “It’s about over-confidence,” says Schwab-Pomerantz, “people with over-confidence are the ones who are misinformed.”
The problem is that abiding by these misconceptions could be almost as financially dangerous as believing money grows on trees.
Take for example the widely held belief that retirees shouldn’t have money in the stock market. Schwab-Pomerantz notes that this notion– which 38% of survey respondents agreed with — can be an issue for both near retirees and younger generations.
The fact is it often makes sense to slowly cut back stock exposure as you age. This is because the time until you will need the money is shrinking, and less time to recover makes your portfolio more vulnerable to short-term market swings. However, at any age having zero exposure to stocks can hurt at least as much as a down market. If your money is not in equities it is likely in cash or bonds. This protects you from volatility, but it also guarantees that even low inflation will cut into the value of your assets since interest paid on savings accounts is low.
“People are very fearful of the stock market,” says Schwab-Pomerantz. “For somebody in retirement, we say you should have at least 20% of your savings in stocks because you could have easily a 30 year retirement. That’s more than a generation. Inflation risk is higher for somebody like that than the stock market risk assuming they’re diversified. Inflation risk can make your purchasing power go way down in a short 20 years.”
Schwab-Pomerantz recalls a conversation with a 43 year-old friend whose financial advisor had just informed her she was not on track for retirement. The reason was the friend only had 30% of her savings in stocks. The friend has time to improve her situation, but she will never get back the lost time and growth.
Young people — who are also often wary of the market after coming of age during the financial crisis – should take on a fair amount of risk since they have a long time ahead of them for their money to grow, but many may not be. A 20 or 30-something with average risk tolerance could have 80% or more of their savings in stocks since they have 30 or 40 years for their money to grow.
null Underlying the sometimes cryptic seeming graphics and streams of numbers that many people associate with the stock market are companies. Like you want your investment and money to grow, the people running those companies you are investing in want to grow too. Need more proof? From its 2007 high through its 2009 low the S&P 500 lost more than half of its value, but people who stuck with it would be up close to 20% from the peak by now.
Click here for more money misconceptions.
Forbes is among the most trusted resources for the world's business and investment leaders, providing them the uncompromising commentary, concise analysis, relevant tools and real-time reporting they need to succeed at work, profit from investing and have fun with the rewards of winning.
blog comments powered by Disqus