The internet is home to lots of bad financial advice, from outdated tips given on forums to ill-conceived strategies parroted on blogs, Reddit and in chatrooms.
For financial professionals, a few pieces of often-repeated advice are especially wrong and especially popular. Read on for the worst advice financial professional see online.
“Debt is terrible, and you should always pay it down as quickly as possible.” This bad advice is often touted by online financial experts, especially when discussing student loans, says Charles Adi, certified financial planner and founder of Blueprint 360 LLC in Houston. While paying down your debt is important, it shouldn’t come at the expense of other, more pressing financial goals. “You need to consider your personal goals and remind yourself of where you are heading,” Adi says. “We need to consider the ‘what if’ (unemployment, sickness, disability, death and potential family needs) and remember to save because cash is still king.”
“Pay off your mortgage as quickly as possible.” “So often do you see popular internet and television personalities suggest paying off all your debts, including the mortgage, so that you are debt-free when, from a pure numerical standpoint, it might make zero sense,” says Ian Aguilar, certified financial planner in Jacksonville, Florida. You may hate your debt, but there are often savvier ways to allocate your funds that will generate higher returns over the long run. “Especially for the clients I tend to target who are in their 30s and 40s, when time is on your side, the market may have the ability to overcome a few bad years here and there and still do better over time,” Aguilar says.
“Trading stocks with a short-term focus is how you’ll beat the market.” “Financial media is built around short-term-ism,” says Jonathan Swanburg, a certified financial planner and investment advisor representative for Tri-Star Advisors in Houston. Financial magazines, newsletters, blogs and other sources may claim to have secret trading strategies that outperform the market. But investors shouldn’t use those strategies to fund long-term goals or overshadow time-tested financial strategies. “Short-term investments are gambling, and the results are not a replacement for long-term planning,” Swanburg says. “If people want to have play money, I’m fine with that. As long as it is a small portion of their portfolio that won’t make or break the bigger plans.”
“Make your investment asset allocation super conservative when nearing or starting retirement.” Following this generic advice doesn’t work for many new retirees who may invest too conservatively too early, says Mark G. Smith, president of Vision Wealth Planning LLC in Glen Allen, Virginia. “The danger is not generating enough return in the first few years of a 30-year retirement to make the plan work,” he says.
“You should take out a mortgage on a property and invest it in something with higher returns.” Not only can this strategy potentially run afoul of financial regulations, it doesn’t make much money sense. “I’ve been shown internet newsletters [that] clients receive touting this idea,” says Levi S. Brandriss, certified financial planner at Ameriprise Financial Services in Bethesda, Maryland. These newsletters often recommend taking out a new mortgage or a second mortgage to take advantage of low interest rates while investing the money in something with higher returns. “From the pure financial advice side, very often, the advice to take a mortgage or second mortgage out of the house is tied to a ‘get rich quick’ type scheme or something inherently risky.”
“Filing a tax extension means you won’t get audited.” Deciding to file for an extension on your taxes to escape an audit is a bad strategy that doesn’t work. “There is no basis in reality, of which I’m aware, for the myth that filing early or late will allow one to escape audits,” says Phyllis Jo Kubey, enrolled agent and certified financial planner in New York City. “The lore that I often hear is that the IRS has quotas for examinations, and the later you file, the more likely they’ll have reached their quota before your return gets processed.”
“The risk of being audited is low, so don’t worry about it.” This is no excuse for not filing your tax returns accurately. “The risk of getting hit by lightning is small, and yet we try to avoid that,” says Morris Armstrong, an enrolled agent in Cheshire, Connecticut. “Why? Because it hurts and can cause permanent damage.”
“If you have to look good for your job, you can deduct clothes, haircuts, makeup and other grooming costs because they’re a requirement for work.” This bad advice doesn’t take into account the reality of the Internal Revenue Service’s rules surrounding business deductions. “Usually, these expenses fall under [the Internal Revenue Code] for personal, family, living expenses and do not rise to a business deduction,” Kubey says.
“You need six months’ worth of living expenses in a savings account.” The problem with this advice is that it may not work for people who could store their money in assets that work harder for them while still having cash accessible for emergencies, says Dennis Nolte, certified financial planner and vice president at Seacoast Investment Services in Winter Park, Florida. Consumers should think about using funds to pay off high-interest debt, secure an employer match in a company 401(k) and put money in a Roth IRA where the principal is accessible. “In reality, if you can get access to your assets in a cheap, fast manner, sometimes having a fund that bears no return and is stagnant is less than efficient,” Nolte says.
“When it comes to determining the percentage of stocks investors should hold in their portfolio, use 100 minus your age.” This often-repeated rule of thumb claims to dictate the best way to determine the balance of your investment portfolio. So if you are 40, for example, this rule would suggest that you hold 60 percent of assets in equities and 40 percent in fixed-income investments. First of all, this broad-based portfolio advice doesn’t take into account that everybody’s retirement needs and risk tolerance are different, says Mike Giefer, a certified financial planner based in Minneapolis. “Life expectancy is increasing, and a 50-year[-old] might still have a 40-year time horizon ahead of them,” Giefer says. “A portfolio that is 50 percent equity and 50 percent fixed income at age 50 is likely far too conservative and risk-averse to deliver the necessary investment returns throughout the rest of their life.”
“Married couples can file as head of household when they live together all year with their spouse and children to score the earned income tax credit.” This bad advice, which appears consistently in online forums, is incorrect, says Nayo Carter-Gray, an enrolled agent at 1st Step Accounting in Baltimore. “Married couples can file one of two ways: married filing joint, or married filing separate,” Carter-Gray says. “There is an extenuating circumstance in order for a married person to qualify for HOH status. Their spouse must have abandoned the family for at least the last six months of the year, and there must be a qualifying dependent.”
