Demystifying the mystified: from investing myths to personal finance mysteries
The world is a complex place full of mysteries, and the field of finance is not an exception.
We’re here to debunk some of the most famous financial myths. While we encourage you not to take this as literal financial advice, we do hope that this at the very least provides an opportunity to get a different perspective and to challenge your own financial status quo.
Here we go!
It could be – if you’re renting it out. And if you’re living in a country where renting is outrageously expensive (but guess what: the world is not all Londons, Amsterdams, and San Franciscos).
Some countries have an established owner culture, which means that people, in general, would rather buy than rent. Their thinking is that renting is throwing money out of the window each month, filling someone else’s pocket. If you think about it for a bit, though, this doesn’t necessarily always make sense. You need to do some math first to figure out if it’s worth buying.
To figure out how much you pay in a year, multiply your rent by 12. Then, multiply that value for 20 years (the number of years for a typical mortgage). If you’re spending €700 for rent ((700 x 12) x 20 = 168,000), it might still be cheaper to keep renting than buying your own place in the same or similar area in the long run (depending on where you live).
Well, actually – sustainable investing can be super profitable. It does take off and it does pay off. Once a niche practice, sustainable investing has become a new mainstream: more and more investors recognise the need to care about Planet Earth and making sure their money isn’t evil. It is now, therefore, a large and growing market.
But what about returns?
According to the most recent insights, sustainable funds actually outperform: the average annual return for them is 6.9% when compared with traditional funds. What’s more, sustainability also has a greater rate of survivorship: 77% of sustainable funds available 10 years ago still exist today, compared with 46% of traditional funds.
The world is changing – and people allocate their money accordingly.
“My savings don’t have a footprint: they’re just lying there in my bank account doing nothing and harming no one”.
Your savings DO have a footprint. And a big one, actually.
If you have $10,000 of savings idling in a bank, this can account up to 1,120kg of CO2 emissions annually. That’s the equivalent of cutting 23 trees. Or flying from London to New Delhi.
The reason this happens is because banks invest your savings in coal, and coal finance has a disproportionately huge impact on the carbon footprint of banks. And, therefore, your savings that you hold in those banks.
So next time you think your money is just sitting there doing nothing, think again. It’s not that innocent.
More often than not, people tend to believe that index investing tends to outperform the majority of actively managed mutual funds. Indeed, index funds (such as S&P 500, etc.) get a lot of positive press. By offering a low-cost way for investors to track popular stock and bond market indexes, index investing is a no-brainer for those looking to generate returns similar to a broad market index.
In the meantime, actively managed funds require hands-on management and, therefore, come at a higher price. The average expense ratio for an actively managed mutual fund, for instance, is between 0.5% to 1.5%, rarely exceeding 2.5%.
To simplify, there are higher expenses associated with actively managed funds.
But does this mean they underperform?
The truth is, actively managed funds DO succeed in producing long-term outperformance even when their fees are taken into account. According to The Financial Times, there’s a number of actively managed funds that consistently beat the market. Typically, it is those funds that are “genuinely doing something different that gives them a long-term edge”.
Bloomberg echoes that notion, saying that 9 of the biggest ESG mutual funds in the US outperformed the S&P 500 index in 2019, and 7 of them beat their market benchmarks over the past 5 years.
In other words, many thematic funds beat their benchmark through finding the future winners that passive strategies sometimes simply don’t catch on time.
Spoiler alert: as a shareholder, you have rights to bring change within a corporation. Often, this is done through public shaming pressuring.
Take Shell as an example again.
While this oil giant has been very much responsible for causing climate change, the truth is, Shell isn’t going to disappear tomorrow all of a sudden. It still exists. Yet, it also is a publicly held company — and it’s coming under increased pressure to align with climate goals. Shell’s large investors like Legal & General, as well as Norway’s sovereign wealth fund, are reportedly looking to divest from companies that aren’t doing enough.
As a result, Shell has actually gone further than the majority of oil & gas companies by setting a carbon reduction target that also includes emission from its customers (i.e. when they burn Shell’s fuel in cars and power plants). They are showing more responsibility (or at least trying to) — at a time when other oil majors refuse to even disclose total emissions.
Now, is this enough to save the world from the climate crisis? Not, but it’s a step in the right direction. Can they do more? Yes, for sure. Can there be even more pressure from investors to make that change happen? Absolutely. Do investors pay attention to consumers’ demands and public protests? Oh yes they do.
You get the idea.
Cost of the fund — while an important consideration — is not the single most important factor to bear in mind. As previously mentioned, mutual fundscome with different costs. Actively managed funds are more expensive than passively managed funds.
Yet, what’s more important is the fund's risk tolerance, previous performance, overall theme (e.g. sustainable funds tend to perform better than traditional funds), and even your personal values. As a climate activist, for example, you might not want to invest in S&P 500, then, which includes Amazon, but you could invest in a green portfolio that includes future climate winners (that will also bring home more returns in the long run).
Can only rich people get more rich from investing?
Simple answer: no.
Of course, the more money you invest, the more money you can potentially make, but anyone can enrich by investing smart and approaching a long-term investment mentality.
When it comes to investing, time and interest are your best friends.
If you invest just €1,000 every year in, say, a fund that earns you 10% annually, you will have:
This isn’t bad considering this requires putting less than €100 aside monthly.
According to Bankrate, the average interest rate for savings accounts in the US is 0.09%, as of September 2020. Yet, the inflation rate in 2020 has been 1.2%. This means that instead of “growing” your money, you’ve actually lost some by letting it idling in your savings account.
It’s good to save for a rainy day. In fact, we should all be having money in our savings accounts to be able to flexibly withdraw it at any time. But if you truly want to grow capital, you should be investing instead.
People divide into two groups.
Group I starts saving for retirement just a few years before they’re about to retire. That’s too late.
Then there’s Group II, the kind of group that starts saving for retirement when they get their first pay check. That’s a winning group. Do belong to that group.
There are countries that take care of you in retirement, there are countries that don’t. Even if countries do help you, it’s often just the bare minimum for living.
Now, this doesn’t mean that you need to devote your entire present life to saving for retirement. Yet, investing €500 every year from the age you received your first pay check can account to a pretty sizeable sum of money by the time you retire — so you hopefully wouldn’t have to worry about paying your rent at that respectable age anymore.
For the over-spenders, credit cards sometimes mean trouble, so the popular wisdom to stay away from them altogether does come from a reasonable place. However, credit cards per se aren't evil. Quite the opposite, they can be used as useful tools to pursue your financial goals, such as increasing your credit score and paying off debt. All you have to do is to make your payments on time and pay in full each month to avoid interest. Plus, many credit cards have reward or loyalty programs that allow you to earn points or money back simply by using them.
Do your research, use with caution — and credit cards will reward you.
As you can see, there are plenty of financial myths to debunk. Perhaps the most important one to demystify is the common misconception that money is a complicated subject to understand — and too difficult to handle. Getting comfortable with “befriending” money, rather than being afraid of it and running away from the topic, is the first step to take to get over your financial paralysis and start being in control of your finances.