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Debunking Financial Myths
By
Catherine M. Gareri, LUTCF |
There are practically as many myths in personal finance as there were in ancient Rome. In addition to being pervasive, personal finance myths have one other thing in common with the Roman myths – they’re not true.
Debunking some common myths should help you avoid what could potentially be extensive financial damage.
Bankruptcy is an easy way to get a fresh start. Filing for bankruptcy will remain on your credit report for 10 years. During that time, it will have a negative impact on your credit rating and may make it difficult to find a job. You may also find it difficult to borrow money. Depending on how you file (Chapter 7 or Chapter 13 for personal bankruptcy), it could also wipe out your personal assets.
Under Chapter 7, a person’s assets are liquidated in return for forgiveness of “unsecured” debt. Typically, the individual will still have to pay off taxes and loans, and sell personal assets. Under Chapter 13, the individual works out an arrangement for paying debts, but retains ownership of assets. The amount paid, based on income, will exceed the amount paid if assets were liquidated.
Filing bankruptcy may delay foreclosure of your home, but it will not stop it; nor will it allow you to stay in your home if you can’t make your mortgage payments.
Only rich people need estate planning. Estate planning serves many roles, including keeping your estate out of probate, ensuring that your assets are distributed according to your will and minimizing the taxes on your estate.
Even if you have little wealth, having a will, choosing a healthcare proxy and providing power of attorney to a loved one are important steps to protect both yourself and your heirs. A healthcare proxy gives a loved one the power to make healthcare decisions if you become incapable of making your own decisions, while power of attorney gives an individual the ability to make financial decisions on your behalf.
The government will pay for my long-term care. Medicaid is supposed to cover long-term care costs only for people who have virtually no assets. In the past, many people with significant assets were able to give their assets to their children, claim that they had no assets and have the federal government foot the bill for their care.
Today, though, the law requires a five-year look-back period. Those who own homes and have more than $500,000 in equity in them are automatically denied eligibility. Applicants are required to disclose any interest in annuities, all transfers within five years and a statement identifying remainder beneficiary status.
People who invest in stocks lose money. There’s some truth to this myth, of course, but you could also say that people who invest in stocks make money.
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Consider the returns of the S&P 500, an index of large-cap stocks. During the 1990s, the S&P 500 produced an average annual return of 15.8%. It produced negative returns of -9.10% in 2000, -11.89% in 2001 and -22.10% in 2002. Since then, it has produced positive returns of 28.69%, 10.88%, 4.91%, 15.79% and, for 2007, 5.49%.
Anyone who invested in the S&P 500 stocks throughout the 1990s would see their investment more than quadruple in value in just a decade. Since then, the S&P 500 has yielded a positive return of just over 1% for the first eight years of the decade.
So what does that mean to the average investor? First, it demonstrates that investment in stocks requires patience. The numbers also demonstrate the need for diversification. Small-cap stocks outperformed large-cap stocks in the early part of this decade.
International stocks and utility stocks have provided big returns more recently. If your portfolio is adequately diversified, high returns in one area can balance out low returns (or losses) in another area.
Look at the numbers and the conclusion should be that, while past performance is no guarantee of future performance, investors can certainly make money from stocks. Anyone who says otherwise is perpetuating a myth.
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Catherine M. Gareri, LUTCF of Uxbridge, Mass. is a Senior Associate with John Hancock’s Westborough Massachusetts Branch Office, AspenCross Financial Group, One Technology Drive, Westborough, MA 01581 and can be reached at 1-800-530-6635, ext. 112 or cgareri.aspencross@jhnetwork.com.
Insurance products offered through John Hancock Life Insurance Company, Boston, MA 02117
Registered Representative/Securities offered through Signator Investors, Inc., Member FINRA, SIPC.
The information presented is not intended as tax, legal or financial advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek such advice from your professional advisors. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
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