The financial services industry is littered with sayings, rules and ideas that either no longer apply or never made much sense in the first place. We spoke to two financial experts about some of the most common financial planning myths.
Myth #1: One hundred minus your age is how much money you should have in stocks.
This may be the most well-known rule of thumb, but it’s also one that applies the least these days. It works like this: Someone who’s 50 should keep 50 percent of their portfolio in stocks. When they turn 60, they should have 60 percent of their assets in fixed income and 40 percent in equities. Sounds easy enough, but in reality “it’s a crude generalization,” says Michael Jack, Investors Group Vice-President Private Wealth Management. “It doesn’t take into account an individual’s goals, time horizon, investing experience and tolerance for risk, among many other personal planning guideposts.”
For higher net worth individuals, this rule is especially outdated. Someone who has a lot saved, for example, would want to keep the portion of assets they don’t need to live on in stocks and keep that portfolio growth going, says Jack.
Many high-net worth people think that as long as there’s money in the bank, they don’t need to bother themselves with financial planning. That’s not true.
Still, everyone needs an effective asset allocation strategy and how one invests may change as they age. However, any changes “should focus on your life goals, not on a simplistic rule,” says Raj Balasubramanian, Ontario Securities Commission Manager of Investor Engagement and Outreach.
Myth #2: Affluent people don’t need plans.
Many high net-worth people think that as long as there’s money in the bank, they don’t need to bother themselves with financial planning. That’s not true, says Jack. Without a plan, people can fritter away their wealth – just look at the many wealthy celebrities who have gone bankrupt. Without a plan, it’s easy to neglect important things such as tax and estate planning – two things that if not done properly, can quickly erode wealth. “The process of financial planning is not based on specific numbers but on individual needs and objectives,” says Jack.
Myth #3: Financial planners only help with investing.
This used to be true, but not anymore. Financial planners spend less time investing than they used to and now focus on everything from budgeting and tax planning to small business succession planning and insurance issues. Essentially, they’ll deal with anything that can impact one’s wealth. “Investing is the most tangible and widely discussed aspect of financial planning, but it is a subset of an overall plan,” says Jack. “It is there to underpin other aspects of the plan – to fuel it.”
Myth #4: People don’t really need a financial planner.
With all the online, DIY services out there, it’s tempting to latch onto this myth and consider it true. But consider your own professional training and expertise: can an unexperienced person do your job as well as you do?
“A financial planner not only provides information but also, and most importantly, expertise. You have thoughts and ideas in your mind about what you want to achieve financially, but you need to concretize them and the best way to do that is to work with a registered person,” says Balasubramanian.
A financial professional can determine appropriate strategies, understand regulations (such as the tax laws) and help people cope with the tough parts of finance, such as market volatility, he says.
Myth #5: Retirement planning isn’t necessary until you’re older.
It’s when retirement is on the horizon that people need professional help, right? Wrong. Everyone should start contemplating retirement as early as they can, but for sure in their 30s. “The earlier you start, the better, because you have longer to profit from the powerful effect of compound interest,” says Balasubramanian.
Creating a plan early that can be revised also helps people deal with changes in their life and financial situation. “Financial planning isn’t a one-time effort. You may start your plan 20, 30, even 40 years before retirement, which gives you plenty of time to make adjustments as your lifestyle and retirement dreams change,” says Jack.
Ultimately, those who take these financial planning myths to heart tend to be skipping out on the hard work of getting their money in order. Common sense, combined with professional expertise, always prevails. Not simplistic rules of thumb.