Notes

5 Worst Types of Financial Advice (in Singapore)

You know the problem with financial advice? It’s the people who dispense it: Insurance salesmen, bankers, property agents…most people in position to give good advice also have no motive to do so. They’ve all got an angle of some sort. And short of strapping them in a chair and going at them with a golf club (pick the bankers, it legally counts as pest control) you can seldom get reliable advice. Instead you get dangerous gibberish, like:

1. The Rental Income Will Pay For The Property

This argument suggests property is practically free. You take a home loan, then rent out the house. The rental income will then cover part (or even all) of the repayments.

Look, if it were that simple, I’d be getting plastered in an Amsterdam nightclub right now, instead of writing this for a living. But I know better.

This advice assumes rental income is consistent. It’s not. Tenants pay late, dispute contract terms, and don’t renew leases. Ask any landlord: Getting tenants to behave is like training cats to execute parade drills. Then there’s the global market: If MNCs implement cutbacks (like now, thanks to the Euro crisis), expatriate tenants start heading home.

It’s true that property is the best investment. But the problem with this advice is presumption: Never assume the rental income will cover the home loan. Always be prepared to upkeep an empty apartment for a few months.

And if you can’t afford loan repayments without rental income, you can’t afford the property.

2. Forex Trading Will Make You Millions

Question: How does an amateur trader make a million dollars on Forex?

Answer: Start with two million.

95% of Forex trading accounts close in the first year. Most dabblers break even; a pitiful few lose everything. Either way, it’s a waste of time and money.

That’s because Forex seldom rewards day traders or dabblers. Don’t get me wrong, it is a viable path to wealth. It’s just not as easy as brokers pretend. Take a look at the typical successful Forex investor:

They start with massive capital (sometimes in the millions), can afford to lose significant sums, and almost always have a career in finance. Moving money around is their full time job. Do you seriously think reading your Dummies Guide to Forex puts you on the same level? That’s like trying to join a PGA tour because Tiger Woods once gave you a golf tip.

In short: If you are the sort of person who could make millions on Forex, you wouldn’t be listening to the broker. The broker would be listening to you.

3. Budget First

Most people only start budgeting once they feel “squeezed”. A common cause is a major purchase (e.g. a car or house). Then these people panic, decide to budget, and find they can contain their expenditures like a haemophiliac can control blood loss.

A better idea is to try to grow your income first, and budget if that fails. For example, say you’re going to buy a car or a house. On your current income, you’ll live about as comfortably as a a pomfret in a desert. Instead of starting a spreadsheet to dictate your purchases for the next five years, focus on finding ways to make more money.

Ask for a raise, find some side-income, change your job. Exhaust every possible avenue of growing your income, before resorting to budgeting. Remember: Earning capacity first, and budgeting second. It should be common sense.

4. Buy Big Company Shares When They Drop

Sometimes this comes from amateur investors. Other times, it comes from market manipulators who are looking to offload garbage.

The idea is that big business is cyclical; when a big company’s shares decline in value, it’s just a matter of time before they go back up again. Because it’s a major corporate establishment, and “it’ll recover for sure”. So buy the shares now, while they’re cheap.

People who cite this advice will invariably mention Apple, and how low Apple shares used to be. Well here’s a counter-example: Kodak. Sometimes, shares go down and stay down. Sometimes, a company’s product is absolutely, irrevocably doomed. There will be no recovery, and the money you put into it is just lost.

“Always buy when low” is a bad assumption all around. If you don’t understand a company, don’t bet on its recovery. Even if it does recover, it could take years for the share value to rise again.

5. You Are Young, You Can Afford To Take More Risks

And being young, you’re also more likely to survive bear attacks. Does that make you more inclined to strap raw steaks to your ass and climb into a polar bear’s cage?

Look, it’s true being younger has advantages. You can take longer loans, you have more working years, and you can live off Maggi Mee for months. But that’s not an accurate form of risk assessment. The amount of money you can lose is based on your income and savings, not on your age (or lack thereof).

In fact, this advice is so bad, sometimes its opposite is true: If you’re a young student with just $5000 in the bank, you can afford to lose less than a 50 year old businessman with accumulated assets. And that’s how you should calculate acceptable risks: Based on the money and assets you have.