3 common financial misconceptions

Having lived overseas for around 7 years, I find the following, and not completely exhaustive list, are the biggest misconceptions many expats and locals have about finance:

1. Stock Markets are more risky than real estate and provide lower returns

Equities are more volatile than real estate in developed countries, but on average, it is a fact that if dividends is reinvested, stocks tend to outperform real estate in the long-term. I am not quite sure where the idea comes from, and found it quite perplexing when people started panicking about a week ago when prices went down 10% (after increasing about 300% since 2009!)

With the exception of London and some top spots, most houses are now cheaper, adjusted for inflation, than 10 years ago, according to the BBC. Even top performing markets such as Canada saw lower gains for real estate against stock prices.

Perhaps it is part of primitive human nature to like something you can touch such as gold or property? Or perhaps people don’t adjust for dividends or don’t calculate the hidden costs of property, which tends to be higher than equities?  Either way, people can have a screwed view.  Volatility and stability are different things.

Property can be a good investment but can only compete with stock markets if you go down the leveraged buy-to-let route.

2. I have enough for retirement

90%+ of people don’t.  Ultimately, you can only take about 4% a year from a lump sum.  $1M sounds like a lot of money to most people, but based on $1M, you can only take out about $40,000 per year.  That is unless you are close to death, don’t care about inflation eroding the gains and possibly running out of cash and/or not having much to leave your kids.

Many wealthier expats who are used to spending a lot of money assume they have enough, but how realistic is it to live off $5000 a month in retirement if you are used to $25,000 as an example?  You should aim for 70% of your previous income to be replaced in retirement, and it is best to not rely on illiquid assets such as rental yields for retirement income.

As an example, if you currently are spending $50,000, you should aim to have at least $35,000 in retirement, which means you need to have around $900,000 on day 1 of retirement.

3.  I should only deal with somebody I know

Many people are with a financial firm because they are friends with the owner, or have been referred to him or her.  That is fine, but sometimes switching can save you thousands or even $100,000 or more, compounded, over a lifetime investing for retirement.  As point 1 shows however, this point is connected to human nature.

People are far more cynical about strangers than they need to be, with some surveys suggesting that respondents believe that there is only a 50% chance of getting lent money returned, when the real figure is 80%-90%.

Manipulative people tend to gradually gain your trust, so apart from a few vulnerable old ladies, most people are not conned by the cold approach.  To the contrary you are more likely to do your homework and be more objective, and less emotional, if you compare 2-3 offers from people you don’t know and have zero feelings for.

If you have any questions about this article please contact me at adamfayed@iamgltd.com

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