Personal finance myth-busters
Post by Mearns & Company in News
Like many areas of life, personal finance has plenty of myths that somehow survive as ‘facts’. Since spring is traditionally a time for sweeping out the cobwebs, let’s clear up four persistent misunderstandings.
Myth 1: Maybe past performance is a reliable indicator of future performance
The sort of sudden, sharp falls in investment values that we have seen recently due to the war in Ukraine can turn normal assumptions upside down. A spell of turbulent markets, combined with dire headlines, can make the future investment outlook appear unavoidably grim. This understandable reaction is simply misplaced: the past is not a wholly reliable indicator of the future, and a few weeks of volatility are no guide to how investors should view future performance, which should have a long term perspective measured in years.
Myth 2: I don’t need a will as everything will automatically pass to my other half
If you are not married or in a civil partnership, then only property you own jointly (as joint tenants) will pass to your partner. The rules of intestacy, which vary between the four constituent parts of the UK, only make provision for surviving spouses and civil partners. Even then, there are often limits on what can be passed to the survivor.
Myth 3: I don’t need a cash reserve as I can always borrow
Borrowing has never been easier and interest rates rarely lower. That may be true today, but financial conditions are never permanent. Mark Twain’s remark that a banker is someone who lends you his umbrella when the sun is shining but wants it back when the rain begins has more than an element of truth. And the fact is the greater your need for cash, the less willing lenders may be to supply it.
Myth 4: You can never lose money buying residential property
The notion that house prices always go up was behind the global financial crisis of 2007/8. In the mid-2000s, many US lenders thought rising property prices would always come to their rescue, an assumption that nearly collapsed the global banking system. In the UK, average house prices fell by over a fifth between October 2007 and February 2009. They did not regain their 2007 peak until May 2014. Adjusted for CPI inflation, house prices had still not recovered fully by January 2022. So ‘safe as houses’ doesn’t always hold true.
Before you succumb to anything that might turn out to be a financial myth, make sure you seek out expert advice. As we know, relying on unverified assumptions can be extremely costly.
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