Financial myths which are untrue

[frozzor]

While I was thinking about finance, it came across to me that maybe a lot of newbies think the wrong way about many things. So maybe you guys could help me make a list of some ideas that many people believe are true but really aren't. Plz correct me if i'm wrong about anything.

I'll start off:
#1 You can save money and live off the interest.
Completely untrue IMO. After taxes you barely beat inflation(if you do). Even with new high yield accounts that give 5%, if you're in the high bracket(like me) you'd only get a little over 3% post-tax. In the long run, using conservative savings and money-market accounts you can't really live off a lump sum because the purchasing power of your money falls. Every time I hear someone say they'd 'live off the 50k interest of 1 million' if they won it, I consider that pretty dumb.

#2 You can't beat the stock market
While most people here seem to believe that investing index funds is the way to go and historically they beat mutual funds, this shouldn't lead to the conclusion that no one can beat the stock market. While it is tough, it is possible for a person to beat the market in the long run. Similar to poker, many people think they're better than they are, and that makes them fish. Also, people should be wary of fund-managers who are more often salesman than actual traders/investors. But there are a handful of people who are quite +EV playing in this game.

#3 Stock market is a zero sum game.
In actuality the stock market is a positive sum game, which has averaged about 10% per year. Options and futures are zero sum markets, but not stocks.

[mo42nyy]

depends how old you are
if your 60 with 1 mil in the bank you probably can live off the interest

[Perplexity]

[ QUOTE ]
#1 You can save money and live off the interest.

[/ QUOTE ]
Obviously with some lump sum, you can live off the proceeds from risk-free investments. You're right that people underestimate the impact of taxes and inflation, and therefore underestimate how large the lump sum has to be. You're also right that the vast majority of people should be holding something other than 100% risk-free investments, no matter how much money they have.

[ QUOTE ]
#3 Stock market is a zero sum game.
In actuality the stock market is a positive sum game, which has averaged about 10% per year.

[/ QUOTE ]
About 10% nominal per year, 6.7% real (for USA).

[ahnuld]

I had to explain to my brother the other day that the stock market isnt a zero sum game. Hes a smart guy so I was pretty surprised he assumed that. I think most people do, espeically students, and that is why the image of a coldhearted capitalist exists.

[Vang]

[ QUOTE ]
depends how old you are
if your 60 with 1 mil in the bank you probably can live off the interest

[/ QUOTE ]True, but you're using the wrong term. You're not really living off the interest, you're living off of principal reduction (the interest just keeps your principal the same value in real terms).

[ilikeaces86_]

When Im 60 and I have 5 mill saved I think I could live off 5% interest or 250,000 I even with inflation I can handle that. Plus even if I am drawing down on a it a little bit I will still never use up the whole nest egg by the time I die 0-40 years later.

[frozzor]

ilikeaces did u even read what the person on top of you wrote?

[NajdorfDefense]

[ QUOTE ]
I had to explain to my brother the other day that the stock market isnt a zero sum game. Hes a smart guy so I was pretty surprised he assumed that. I think most people do, espeically students, and that is why the image of a coldhearted capitalist exists.

[/ QUOTE ]

This is because most people are ignorant, especially the smart ones, who act even more idiotic than dumb people cos' at least the dumb people don't pretend to know everything.

[punkass]

Myth: By forgoing the cup of coffee in the morning, you will save enough for _________ .

I hear this a lot, especially from co-workers. "I started not getting my coffee in the morning because I heard that $3 I save each day will grow ridiculously. Excuse me while I buy my lunch and not change my other habits that are way worse."

[prohornblower]

Generally, I don't think these myths are untrue.

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