You’ve just got that first break you’ve been looking for. At 21, you landed a job close to home – and it pays well to boot! You walk into your local bank to open a checking account, and guess what? The friendly lady there starts giving you a pitch: Start investing in mutual funds, stocks and ETFs for your retirement now…or you’ll regret it!
What do you do?
Retirement Investing Myths Busted
The truth is, your “friendly” bank lady is perpetuating an age-old investment myth that doesn’t hold true any longer. Sure, you need to save as much as you can for a rainy-day (i.e. emergencies and retirement), but don’t fall for the myth that investing in equity and forex are the best vehicles to prepare for retirement. In fact, investing for retirement – especially if you are in your early twenties – might not be a great idea at all.
Here are 6 good reasons why retirement investing “peace of mind" is a lie:
- The convenience myth busted: This myth holds that using automatic savings plans (ASPs) to invest in mutual funds and stocks is a convenient way to build your retirement nest egg for your golden years.
But what they don’t tell you is that, when those years finally dawn upon you, there are too many government restrictions on accessing your own money. You can get penalized if you touch it before a certain age. You can get fined for pulling out too much or too little in retirement. There are even laws that dissuade you from “over contributing”!
- The “In your best interest” myth busted: This myth seeks to convince trusting investors that money managers always have your best interest at heart when you entrust them with your retirement investments.
Of course, what’s never stressed enough (at least during the initial conversations) is that the only interest they truly have in mind is their own. If that were not the case, wouldn’t they structure their retirement investment advisory model as a win-win engagement - If you lose money, we (your advisors and fund managers) won’t make any money off you either.
Instead, if your retirement portfolio balance is down by 25% in any given billing-period, your trusted adviser will still charge you the same x% management fee. For what? Just because you’ve asked them to keep your interest in mind doesn’t mean they must ding you even when they’ve failed to do just that.
- Tax efficiency myth busted: This myth states that retirement investing is a great tax-saving strategy. The more you invest, the more tax you’ll save.
What’s conveniently missed out in this discussion is the fact that nothing is tax free. You pay taxes on money before you put it in. You’ll pay less tax (hopefully, but there’s no guarantee of this) when you pull it out. No one can say for certain they'll be in a lower tax bracket in retirement - in 20 or 30 years from today. No one can guarantee what the tax structure or laws will be...so how can they say it's "efficient"?
- Retirement "safety net" myth busted: This one is a doozie, and here’s how it’s typically sold: Investing now means you’ll have a tidy sum saved up by the time you retire. You’ll live comfortably and can safely pay for housing, medication, insurance, vacations and all your other retirement needs.
Or just go back in time and see what the 2008 financial crisis did to retirement investment accounts. Some retirees – and soon to be retirees – lost almost 100% of their savings. They'll tell you that that retirement investing is a scam and there’s no real safety net at all!
- The "buy low sell high" myth busted: This myth too stacks the “invest for retirement” thesis against you. It states that investors are better off, in the longer-term, when they buy on dips and sell on rises.
If "Buy low sell high" were true, how come investors (on the advice of their advisers, of course!) are buying and selling every day? Shouldn't there be a time when no one buys because it's "high", and no one sells because its "low"? And what happened to “don’t time it!”? Unless you do time things, how will you buy just when things dip, or sell at the highest point?
- The "timing the market" myth busted: This is a favourite among retirement investment advisory firms. It goes something like this: It’s not timing the market but time in the market that counts
Investment advisers tell you not to time the market when you buy stocks, ETFs or mutual fund units. Yet, they’ll happily set up timed weekly or fortnightly investment options – that come out of your account regularly, each week-day like clockwork every time.
And yet again, when it’s time to cash-in, isn't timing what they are asking you to do when they plan to sell your investments in 20 or 30 years, so you can access your money? When that time comes, they'll force you to sell even if your investments and forex balances hit rock bottom! They’ll time the market when they decide it’s time to sell!
So, is there any scenario where retirement investing makes sense? Well, there is…read on to find out when, and for whom.
Turning Myth to Reality
The retirement investing myth does turn to reality, however, in one very specific situation: And that is if you are a banker, investment adviser or Wall Street hedge fund manager.
Ironically, the retirement investing paradigm is structured in such a way that, whether investors buy low and sell high – or vice versa, and whether they time or mis-time the markets, one thing is for certain: The bankers, wealth advisors and fund managers make all the money, even if individual retirement fund accounts drop to zero.
And that’s the only time these myths turn to reality!
So, what should you do? Invest in yourself instead. Use your savings to pay to acquire new skills or to upgrade your qualifications. Most of all, pay down your credit card debts or student loans ASAP. That’s where the real investment returns will come from.