Be Careful Listening to Pop Culture Financial Advice

There is a lot of what I call pop culture financial advice being given these days.  What is Pop Culture Financial Advice?  It is advice preached to the masses from the financial services industry to calm fears and reassure investors so they won’t change their investments.  After all, if investors sell mutual funds, mutual fund companies don’t make money.

Most of the time it comes from three sources.  First, it is advice given by financial media with no experience investing or managing money.  Second, it is advice given by people who have no choice but to follow pop culture advice. Finally, the worst is advice given because of a financial agenda.

Here are some popular examples:

You are a long-term investor.  Most of the advice is to reassure you that you are a long-term investor as if being a long-term investor is a strategy for risk.

Never time the market because you will always be wrong.  I would agree that it is tough to pick the lows and the highs of markets.  However, the industry confuses timing with risk management and decision making. You can also be wrong as a long-term investor.  It doesn’t work all of the time for everyone as marketed.

If you are young, take maximum risk because you have time on your side.  In theory it makes sense with one slight change. You take risk to be rewarded.  There is a ratio between risk and reward.  Why would you take risk if the probability was low that you get rewarded?  Why not wait until the ratio is a little more in your favor rather than acting like it is 100% of the time?  Age is not a substitute for thought concerning risk.

Finally, my favorite is the invention of Target Date funds as a way to invest for a life-time. Target date funds are based on your age.  You pick the target date fund that is closest to your retirement date and as you age the allocation of stocks and bonds (in theory) gets more conservative.  There are numerous flaws in this theory of letting age dictate your risk level.  (don’t forget the whole risk and reward ratio)  The more concerning one is that at retirement in a lot of these funds you are still taking a great deal or risk!

Take for instance the 2015 American Airlines Target Date Fund found in their 401 K plan.   It has 52% invested in stocks and 48% invested in bonds.  That allocation in itself seems a little risky to me given someone in retirement.  If that is not bad enough, the types of stocks and bonds are a little concerning.  Of that allocation I found these investments

19% of the portfolio is in international stocks.

4% of the portfolio is in an emerging markets stock index

Said another way, 23% of the portfolio is in some of the most risky stocks you can invest.

9% of the portfolio is in a high yield bond

High yield means low quality bonds.  Once again, high risk for the retiree.

26% of the portfolio is in an inflation protection fund

Inflation?  We are in a deflationary cycle.  That one really left me scratching my head

Following Pop Culture Financial Advice can be dangerous to your financial health. Know your own Prudent Money DNA and risk level.  Be comfortable with that and stay true to yourself rather than blindly follow pop culture finance.  If this is a bear market we are dealing with, that pop culture finance will be a recipe for disaster!

If you would like to know a little more about your Prudent Money DNA, take the risk analysis and receive a risk analysis at no cost.  Just click here!

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