Before the financial crisis, the world of high finance had become its own priesthood. If anyone could understand derivatives, then they were considered the physicists of finance. However, when Lehman Brothers collapsed, the financial system went into a seizure. In those scary times, the world economy almost toppled over.
Although the economy has rallied despite an $18 trillion deficit, our naiveté has also returned and the default state when it comes to investments is to go with an investment banker rather than manage our own investments.
Perils on the Path of Least Resistance
According to a well-researched book by Anthony Robbins: MONEY Master the Game: 7 Simple Steps to Financial Freedom, which is based on interviewing 50 of the most successful financial experts in the world, if you decide to follow this line of least resistance, here are 5 myths that you will likely hear when you consult with an investment banker:
Myth #1: Mutual funds beat the market.
Fact: Only about 4% of mutual funds beat the market. Buying index funds is a smarter move. These do well because they mirror a spectrum of asset classes.
Myth #2: Managed mutual funds are your best choice.
Here’s the story?you’re?likely to hear:
“$10,000 in a managed mutual fund is a good way to start. Contributing $1,000 per annum is a good way to go. And getting an 8% average rate of return for the next four decades is a winnable game.”
But here’s what will be left out of this rather convincing fairy tale:
Fact:?“Your mutual funds will cost you $294,415.93 because they have a 3.17% expense ratio.
Now, if you had been financially literate and invested in your own money, this is what you would have done:
You would have bought index funds. The same deposit at the same contribution level for an index fund would have only cost you $24, 585.88 because the expense ratio would only have been 0.17%. Compared to the managed mutual fund, you would have saved $269,830.04.
Myth #3: A mutual fund prospectus is an accurate documentation.
Fact:?Mutual fund prospectuses don’t overtly lie, but the listed rate of returns is entirely speculative and what you see is not what you’ll get. In fact, you’ll rarely see anything close to those rosy projections.
Myth #4: Your investment banker cares about you.
If this were true, you would not be sold funds high in fees and hidden expenses that empty your wallet.
Myth #5: All you need to retire well is a 401 (k)
Fact::?While a 401 (k) is certainly an excellent retirement strategy—it is only one asset class. It’s a great idea to also add insurance policies, annuities, and Roth IRAs.
More Lies Ahead
These are only a small sample of the myths, you’ll hear. Many other also exist: for instance, target date funds are good, annuities are bad, and only high risks bring high returns.
While it’s somewhat extreme to say that all investment bankers use myths to beguile unwary investors, why not learn enough about investing to keep an eye on your own finances?
The Case for Self-Reliance
Imagine what would happen to your money if you knew how to consistently get high returns for your low-risk investments, learned how to diversify your investments across a wide range of asset classes, and understood how to spread your risks without causing a hiccup in your high returns?
In actuality, it’s not as hard as you may think to become good at managing your own money. Getting your hands on stock analysis software for traders will give you the platform you need to get fast streaming real-time market data, as well as news and analytics. Besides looking at market data, you can do back testing and access a variety of indicators.
However, tools are not enough to become a good craftsman, you also need training. Begin with self-education to get up to speed. Learn basic math skills; learn a few key definitions, primary concepts, and fundamental economic theories. Next, sign up for a rigorous training program to get good at this skill. All this time, of course, you will be paper trading. Finally, find a mentor, someone who is doing what you hope to do, who has the track record to prove that they know how to beat the record. The important thing is not to be in a hurry to get started. Prepare for your future as carefully as a French cook training to work for the finest restaurants in the world. It may take time, but it is time well spent.
Until the?financial crisis in 2008,?investment bankers were considered trusted experts. Now it’s time to ask the tough questions. Who is more motivated to help you grow your money: you or your investment banker? While you worked hard for decades to save every penny of investment capital, your investment banker sat in a comfortable office with a large roster of clients and made a comfortable living from high fees. Who has more to lose? Who is willing to work harder to make sure that everything works out? If you try self-reliance, it may just change your future.