10 Financial Truths that are Just Plain Wrong

Many of the financial planning concepts and strategies that have been around for many years are just not applicable to most folks. A lot of these so called “truths” developed out of the need to sell products rather than doing what is right for the client. In the next few blogs, we are going to debunk these financial “truths” and set the record straight. Much of this information comes from a real pioneer in the fee-only financial planning arena and his name is Bert Whitehead, the founder of Alliance of Cambridge Advisors, of which I fortunate to have been a member for the past 13 years. And am still actively involved. So, let’s get started


1. Risk Tolerance is an important consideration in your portfolio---WRONG

Most financial advisors, stock brokers etc…. administer a psychological test to clients to assess their psychological tolerance for risk. This is really a CYA strategy that is more about protecting the advisor or broker. The real question that needs to be probed and addressed is how much risk the client currently has in his/her life. Based on an analysis of current risk, we then determine how much risk is appropriate for the client.


We look at things like job stability, persons dependent on your income, current savings level, protection against inflation and deflation and risk needed to meet the client’s goals. I am a big fan on only taking as much risk as is needed. This is totally counterintuitive to psychological risk questionnaires. For example, let’s assume that a person answers test questions that show an enormous appetite and tolerance for risk. However, they are in an unstable job, married with 3 people dependent on him/her and have not been saving much. It doesn’t matter how the test scores came out, this person should not be taking a great deal of risk in their investments. Get the picture?


Bottom line… It is the current risks in your life/job/circumstances that are important and not some risk tolerance score based on a set of questions.


Next blog…we will look at debunking myths about inflation. Stay tuned.