As the times change, so does the world of finance. Some investors are still stuck on “rules” of investing that have become obsolete, and sticking with these old adages may hurt you in the long run.
As experienced financial professionals, the members of Forbes Finance Council know the importance of keeping up with the latest trends—as well as understanding which ones no longer apply. Below, they share 14 widely believed “rules” about investing that are outdated or inaccurate, as well as what you should do instead.
1. ‘Your age dictates allocation to bonds.’
We have all heard the rule of ages—if you’re age 65, then you should have 35% in equities and 65% in fixed income. The reality is that allocation depends on a client’s cash flow needs as well as their retirement goals. With fixed income paying such low rates, why not add a high-dividend-paying utility fund or stock to create a bit more potential upside? – Richard Martin, Bluestone Wealth Partners
2. ‘Current valuation measures are all that matter.’
This isn’t to say you shouldn’t pay attention to valuation, but if investors had gotten hung up on current valuation measures they would likely never have owned great companies like Amazon or Salesforce. These have never been cheap over the last 15 years, yet they have been two of the best-performing companies over that time. A better “valuation” analysis is revenue to the “addressable market.” – Gerry Frigon, Taylor Frigon Capital Management LLC
3. ‘You can’t hold a real estate investment in an IRA.’
Actually, yes you can. Investments such as real estate, private equity, notes, precious metals and more can be held in a tax-advantaged retirement account such as an IRA. These types of plans are known as “self-directed” retirement accounts. The benefits of these plans include a hedge against stock market volatility, portfolio diversification and better control over investment returns. – Jaime Raskulinecz, Next Generation Trust Company
4. ‘Private markets are only for the ultra-wealthy.’
The landscape has changed for private market investing. Private equity, real estate, venture capital and others are now all accessible to the average investor. Ensuring your financial planner is giving you the proper options in diversifying your portfolio is essential for maximizing your savings and retirement portfolio. – Stephen Bruce, The Family Office Group, a marcus evans Company
5. ‘Don’t hold your portfolio in cash.’
Cash is a critical piece of your investment portfolio strategy. With the recent market selloff, those holding 10% to 20% of their portfolio in cash will have seen their portfolios decline less and are now in a great position to buy in the trough when the timing is right. – David Herpers, Credit One Bank
6. ‘Try to time the market.’
If you’re investing, you’ll inevitably deal with ups and downs in the market. Instead of timing the market, invest for the long term with a diversified profile and let falling stocks ride. If you invested the day before the Great Recession and then sold nothing, you’d be up 8%. Tony Robbins’ Unshakeable: Your Financial Freedom Playbook explains how to change your perspective to the long term. – Joe Camberato, National Business Capital & Services
7. ‘Always make extra mortgage payments to pay it down faster.’
One rule that may have become obsolete is paying down your mortgage quicker. With mortgage interest rates being so low there is a strong argument to not make extra payments to eliminate your mortgage quicker. Instead, one can earn a higher return over time in the market, build liquidity and better prepare for retirement. – Amir Eyal, Mylestone Plans LLC
8. ‘Draw 4% from your portfolio annually.’
The old-school rule of drawing 4% annually from your portfolio just doesn’t work anymore. In the past, 4% could easily earn you a comfortable retirement, but with the current economy, it just wouldn’t be enough. With the rise in the cost of living as well as additional fees for advisors and funds that number just won’t cut it. Instead, factor in all possible costs to reach a solid final number. – Greg Herlean, Horizon Trust
9. ‘Set it and forget it.’
I heard this frequently when I joined the professional marketplace: Add to your retirement and never look at it because it will build over time. While yes, it will build over time with continuous contributions, it is important to check at least quarterly to gain insight on where your money is and adjust if it is not providing the types of returns that you might expect. – Kelly Shores, GCubed, Inc.
10. ‘Immediate revenue proves a business’ viability.’
One common rule for early-stage investors is needing to show a level of revenue to prove business-model viability. Revenue is great—it’s second only to profit. But certain business models—especially business-to-consumer startups—require a build-up to monetization. When you start charging consumers, they change from free “users” to “clients,” which adds complexity and responsibilities. – Anderson Thees, Redpoint eventures
11. ‘Maximize tax-deferred contributions.’
Conventional wisdom holds that investors should maximize their contributions to 401(k) accounts and IRAs to capitalize on tax-deferred compounding and lower future tax rates. But holding equities in a taxable account is more tax-efficient for most investors. Keep tax-inefficient assets, such as bonds and other income-oriented investments, in tax-deferred accounts. – James Dowd, North Capital
12. ‘Plan for 75% of your current living expenses in retirement.’
It was commonly thought you had to plan investments around saving 75% of what you live off of today. Given the rise in life expectancy and overall medical costs, that rule is now more like 100%. To prepare for retirement, you should invest with added inflation and turns in the market in mind. – Jared Weitz, United Capital Source Inc.
13. ‘Diversify as much as possible.’
Diversification has long been touted as a solid investment strategy. There are many asset classes and industries that an investor can allocate capital to as part of their portfolio. However, gaining deep expertise within a very focused area and becoming an expert at that can often help you leverage opportunities within that niche for much greater returns than a balanced, diversified portfolio. – David Brim, Bright Impact
14. ‘Make financial plans based on huge ROI.’
Many investors seem to believe that their financial future depends on huge investment returns. Instead, we build financial plans that anticipate average rates of return and even market corrections. This gives our clients peace of mind about the future, even through downturns. The key to long-term success is to live within your means, save and invest wisely. – Mia Erickson, Whitnell