How Can Good Advice Be Bad

There is a list of good advice items that could be bad:

  1. You can rent a home cheaper than own it. If you invest the money you save on the cost of ownership above rent in an S&P 500 index fund you will come way ahead. This is arithmetically true over history.
  2. You should buy term life insurance and invest the premium difference in the stock market.
  3. You should never buy a managed fund because of the high fees.  Instead, prefer self administered ETFs and index funds and keep the fees for your own account.

Owning a home.

  1. You can make a case for either side of the argument. The key is the ratio of the cost of the home to the annual rent. That varies greatly over time. Presently it looks like 16 to 20 times, which indicates rent instead of own.  There are other factors to consider.
  2. Mortgage rates to own are quite low now, so buying looks easier, even though you pick up a gaggle of other ownership costs. Municipal taxes, insurance, and maintenance being the obvious ones.
  3. What will mortgage rates be during the period you owe the money.  Today is just one of the days you will owe the bank.
  4. Would you calculate your savings and invest it every month for the duration?
  5. Would you spend any of the accumulation?
  6. Do you know how taxes on accumulating income would affect you?

Buy Term and Invest the Difference

There are questions you must ask before deciding

  1. How long will you need the coverage? If more than 15 years or so, it is cheaper to buy participating life insurance and cash it in when you don’t need it any more.
  2. Have you considered that investments will generate taxable income?
  3. Have you considered that your health might change and the permanent insurance might give you a chance to anti-select against the insurer
  4. Have you noticed that term insurance is actuarially designed to expire before you do?
  5. Have you noticed that the renewal premium at age 80 or so is enough to give you a heart attack?
  6. Would you calculate your savings and invest it every month for the duration?
  7. Would you spend any of the accumulation?

Avoid investment management fees.

There are questions:

  1. Do you know what you get for the money you pay in fees and therefore what you will give up when you go the do-it-yourself route?
  2. You will be your own advisor. Do you a have a good track record?
  3. Will you always save what you are supposed to save to reach your goal?
  4. Will you spend any of it when there is no one to call you on it?

Observed results

People who rent tend not to save the extra. People with a paid for home tend to have a greater net worth than renters.

People who own permanent life insurance tend to value it when they are older.  People with valuable term usually are younger and have huge risk needs and little cash flow to deal with them, so no easy saving either. 

People who pay management fees tend to end up with more money because fees buy more than money management. 

The common theme:

  1. People are not disciplined enough to invest their savings or avoid spending their accumulations. In the case of the house purchase, try missing a payment and see how the bank will help you be disciplined.
  2. People don’t understand how the investment funds return is not the same thing as after tax growth.
  3. People have trouble estimating their needs in the distant future.
  4. People have trouble doing a complete analysis because some are arithmetically challenged and some forget that there is a lot more involved with investing and reporting to the government than they thought.

You need an apples to apples comparison

If you value your time at zero, and believe you can do a good job in a complex field where you have no experience or training, then almost anything is worth doing yourself. Most of the time though, our time is not valueless and we make mistakes when doing complicated things.

Any narrow argument can make sense when your analysis includes an implicit assumption that all other things are equal.

They never are.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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