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Seven Pieces of Conventional Wisdom That Aren’t So Wise

“PRACTICAL MEN, WHO BELIEVE THEMSELVES to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist,” wrote John Maynard Keynes in his 1936 classic, The General Theory of Employment, Interest and Money.

The same can be said of U.S. investors. We grow up repeatedly hearing the same standard financial advice—and often we never question it. Yet there’s much conventional financial wisdom that isn’t especially wise. Consider seven examples:

1. Stocks are risky.

Reality: Sure, they’re risky. But the implication—that other investments are less risky—simply isn’t correct. Bonds and cash investments may not offer the rollercoaster ride that you get with stocks. But they leave you vulnerable to inflation, which is arguably an even bigger threat.

2. With hard work and intelligence, you can beat the market.

Reality: Reams of statistics prove that very few money managers beat their benchmark index over a 10-year stretch. What about the minority of managers who come out on top? There’s no surefire way of identifying them in advance—and their strong performance is no guarantee they’ll keep on winning. But don’t take my word on it: Check out both the SPIVA and persistence reports from S&P Dow Jones Indices.

3. You can’t go wrong with real estate.

Reality: Ten years after U.S. home prices peaked in 2006, the real estate market was still underwater, as measured by the S&P CoreLogic Case-Shiller U.S. National Home Price Index. But memories are short—as evidenced by the exuberant double-digit price gains over the past year in markets such as Portland and Seattle.

4. A mortgage is the best debt you can have.

Reality: If you have to borrow, a mortgage is more attractive than, say, a car loan, credit card debt or margin loan. But that’s different from saying it’s desirable to have a mortgage. Rather, consider mortgage debt to be a necessary evil—and look to get rid of it earlier rather than later.

5. When you’re in your 20s, you should pursue your passions.

Reality: If anything, devoting your days to activities you’re passionate about will likely prove more important in your 40s and later. At that point, most of us are less focused on collecting external rewards like pay raises and promotions, and more interested in taking on work that we find personally fulfilling. Our advice: Go for the big paycheck in your 20s and 30s, and save as much as you can, so you have the financial freedom to pursue your passions later in life.

6. Money buys happiness.

Reality: Even as the U.S. standard of living has more than doubled over the past four decades, reported levels of happiness haven’t budged. Why not? People rely on conventional notions of the good life—and aren’t sufficiently thoughtful about how they spend.

For instance, if you use your money to buy a boat or a second home that involves a lot of upkeep, you may discover you have bought yourself a fistful of headaches. But if you use your spare dollars to take a trip, help your favorite charity or bring your family together for a special meal, there’s a good chance you’ll boost your happiness.

7. Retirement is a chance to relax after four exhausting decades.

Reality: Thanks to the instincts we inherited from our hunter-gatherer ancestors, we aren’t built to relax. Rather, we’re built to strive. Many of us get a lot of satisfaction from work. Retirement should be seen as a chance to take on activities that we think are important and we’re passionate about, without worrying so much about whether they come with a paycheck.

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