Take These 7 Money Rules with a Grain of Salt

The problem is that later in life, the costs of some of these policies can skyrocket and, in retirement, you might not be able to afford the premium. Term life is very cheap compared to permanent insurance, so I’d rather buy term life and invest the money I’ve saved.

Just as I’m very happy to have no need to collect on my home or car insurance, I’m quite OK to have a term life policy expiring worthless.

4. “We have beaten the S&P 500 index over the past decade.”

It’s certainly possible that the investment someone is trying to sell you has risen in value at a faster rate than the S&P 500, the most commonly used benchmark for U.S. stocks.

But beating the index doesn’t mean you’re beating the market. That’s because the standard S&P value you see in the news measures only the price appreciation of the stocks in the index, not the dividends they pay. Since 1926, nearly one-third of the S&P’s total return has come from dividends; in the last 10 years, while the index has risen about 190 percent, the total return of the S&P, with dividends reinvested, was 250 percent. So comparing the total return of Brand X investment to an index’s price appreciation is like comparing apples to crab apples.

5. "You insure your house and your car, so you should insure your nest egg."

I agree — you should carry insurance in case your house burns down or you crash your car. And, yes, you don’t want your savings to disappear.

But this argument — often part of a sales pitch for certain financial products — fudges a big difference between traditional insurance and the “portfolio insurance” you’re being pitched: the cost. When an insurer pays a claim on your auto or home policy, that money comes from premiums paid by other customers who haven’t suffered a loss. But with products you buy to ward off investment loss, the only one funding your protection is you, in the form of fees and limits on potential gains. A conservative portfolio will protect you for less.

6. "Index investing is conservative and guaranteed to underperform the market."

It’s true: Broad index investing done right will get the return of the market less fees. Let’s say you put $10,000 in a total U.S. stock market index fund with an expense ratio of 0.05 percent. (That’s five-hundredths of 1 percent of your account value per year, a realistic fee for an index fund.) If the stock market goes up 7 percent in a year, you wouldn’t end up with $10,700 — your original investment plus a 7 percent return — but $10,695. So yes, you’re $5 short of the market performance.

But compare that to putting the same $10,000 into an actively managed mutual fund, where a more likely expense ratio is 0.65, or almost two-thirds of one percent. Assuming the fund matches the market’s return (though odds are against it over time), you’d end up with about $10,635, or around $65 less than the market’s return. Compound that over several years and the higher cost of an actively managed fund will make a much bigger dent.

7. "Don’t put more money into an IRA or 401(k), since you will ultimately pay more taxes."

When you put money into a traditional IRA or 401(k), you don’t have to pay taxes on the money you put in; instead, you pay taxes only on your withdrawals from the account. So if your portfolio grows handsomely over the years, yes, the taxes on the larger amount of money you withdraw might be higher than the tax bill you avoided on the smaller amount of money you put in.

But this observation, which you might hear from someone trying to convince you to put your money elsewhere, shortchanges the benefits of these tax-favored accounts. For one thing, any investment gains in a 401(k) or IRA portfolio are free from taxes, while returns in a regular taxable account can be taxed every year, eating away at your returns little by little.

And because incomes tend to drop upon retirement, you’re likely to move to a lower tax bracket, so a smaller proportion of your account withdrawals will be taxed. If you think your tax rates will be higher, consider contributing to a Roth retirement account. You won’t get a tax break in the year you contribute, but again, you won’t be taxed on any gains year after year, nor will you have to pay any taxes on money withdrawn in retirement.

Finally, if you employer matches contributions to your 401(k), that’s like getting free money. No matter the taxes, you still come out ahead.