In the diverse and complex world of ‘financial wisdom’, bad financial advice is all too common and can not only derail the best-laid plans but, in extreme cases, lead to financial ruin. It’s there, sometimes hidden in plain sight, making promises of extraordinary gains and surefire bets. As pros in the financial arena, we’ve seen our share of bad to outright dangerous advice. Today, let’s chart a course through the murky waters of poor advice, highlighting what to look out for along the way.
We’ve all heard it, perhaps even from well-meaning relatives at a family dinner. “Why risk it? Just keep your money in savings!” At first blush, it seems sensible. Your money stays safe, and you know exactly where it is. But here’s the twist: inflation is a silent thief, and it loves nothing more than eroding the purchasing power of your safely parked funds. While a savings account is a crucial part of a healthy financial portfolio, putting all your eggs in this basket might mean they’re slowly getting scrambled by inflation.
The only way to grow wealth and effectively get ‘richer’ is to have your money grow at a rate that is higher than inflation. So, with the average inflation rate in South Africa being about 5% – you need a large portion of your investments (particularly those earmarked for the long-term like retirement) – growing at a rate of 10% plus (or Inflation Plus 5) to achieve a secure financial future.
Pro Tip:Â When last have you checked your retirement fund statement to see what kind of returns you’re getting? If you’re not averaging close to (or above) 10% per year, you need to review your strategy.
Read Next: Key Principles of Investing That Give You The Greatest Probability of Achieving Your Goals
Go back 30 years the housing market was relatively affordable for the middle class. The average cost of a middle-class house would have been around ZAR 100,000 to ZAR 150,000, depending on the location and size.
Fast forward to today, the average cost of a middle-class house in South Africa has skyrocketed. Depending on the location, especially in urban areas and cities like Cape Town or Johannesburg, the average price can easily range from ZAR 1.5 million to over ZAR 3 million for a middle-class home.
This increase isn’t just about the housing market; it’s a clear indicator of the long-term impact of inflation. Inflation erodes the purchasing power of money, meaning that what ZAR 100,000 could buy 30 years ago is far less than what it can buy today. This example underscores the importance of investing and planning for the future, considering how inflation can affect savings and investments over time.
To put it into perspective, if we consider an average annual inflation rate of around 6% (which has varied over the years), the purchasing power of money halves roughly every 12 years. This demonstrates the critical need for financial planning and investment strategies that outpace inflation to preserve and grow wealth over the long term.
Be it cryptocurrency, the newest tech startup, or any asset class that’s currently having its moment in the sun, chasing the latest trend is often pitched as the path to prosperity. However, jumping onto the bandwagon without understanding the ride can lead to a financial faceplant. Good investing requires a strategy, not just a trend. Diversification, not putting all your hopes in one speculative basket, is key.
Case in Point:
One of the hottest trends 5-6 years ago was marijuana/cannabis, as it was being legalized in Canada and certain states in the US. After seeing parabolic moves in specific marijuana stocks early on, the wheels came off in a big way, as the realization that running a profitable enterprise in this space is actually not that easy (especially when still in direct competition with the illegal market). One of the largest Cannabis ETFs (MSOS) has lost 60% in value as a result.
For every trend that does have genuine long-term potential (like artificial intelligence and Bitcoin) – 10 will turn into duds. It’s all very well speculating, but do it with money you’re prepared to lose. And know the difference between investing and gambling (speculating).
Further Reading: The Best AI Investment Opportunities in 2024
Debt consolidation can be a helpful tool for managing overwhelming debt, but it’s not a magic wand. Sometimes, it’s pitched as a cure-all solution. The reality? It can be more like rearranging deck chairs on the Titanic if you don’t address the spending habits that caused the debt in the first place. A holistic approach to debt management, including budgeting and financial education, is often necessary to truly right the ship.
The other side of this coin is using leverage (debt) to invest, which can turn into a very dangerous game and wipe you out financially. Unless you’re an absolute pro (and even then it’s dangerous) – avoid leverage when investing. You want to be able to sleep well at night, and for most of us, debt is one of the enemies in doing that.
Read Next: How to Become Debt Free and Why You Should Do That As Quickly As You Can
Complexity in investing often benefits the advisor more than the investor. Beware of anyone pushing overly complicated products that promise high returns with little risk. The backbone of most successful investment portfolios is surprisingly simple and based on well-established principles of diversification and long-term growth.
Everything starts with the outcome you’re aiming to achieve – whether it be grow wealth to achieve financial freedom or retire successfully, manage family or generational wealth, providing a steady income in your retirement years – and then creating an investment portfolio designed to achieve that.
The tools and investments to achieve that will be simple and timeless. Stocks, bonds etc. whether purchased directly, using ETFs, or in professionally managed fund solutions. And then making sure your asset allocation reflects the outcome you’re targeting. Investing isn’t easy. But the strategy should be simple to implement and adopt.
In the digital age, social media platforms and influencers have become ubiquitous sources of information and advice, including financial guidance. While TikTok and YouTube can offer valuable insights, they also present a unique set of dangers when it comes to financial advice. The democratization of financial knowledge is a double-edged sword; for every seasoned expert sharing wisdom, there’s an equal number of well-meaning amateurs or self-serving personalities peddling oversimplified, misleading, or downright dangerous advice. Even taking advice from experts on reputable media channels like CNBC, Bloomberg etc. can be dangerous because they have no insight into your unique situation, and they hold no accountability for investments they punt that end up going wrong. Good financial advice is always tailored to you, your circumstanes, and the goals you’re striving for.
Read Next: The Value of Financial Advice Today and When to Consider Adopting a DIY Approach.
As we navigate through the fog of financial advice, remember that the true north of good financial planning is simple: it should be understandable, it should align with your goals, and it should be sustainable over the long term. If an offer sounds too good to be true, it probably is. Always consult with a professional who takes the time to understand your financial landscape and helps you chart a course that makes sense for you. Remember, in the world of financial advice, the best navigator is educated skepticism paired with professional guidance. Let’s set sail towards a future where your financial wellbeing isn’t just a hope, but a well-charted plan.
Carl-Peter is a Director and Partner at Henceforward with more than 20 years experience. He is a CERTIFIED FINANCIAL PLANNER committed to helping his clients making good financial decisions in order to help them achieve their goals.
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