You know the phrase don’t believe everything you see on social media? Well, it doesn’t only apply to influencers’ waistlines and wrinkle-free faces. It also applies to the advice dished out by the newest category of influencer – the finfluencer.
Finfluencers are financial influencers and they make financial education fun by turning it into a meme or controversial quote and putting it into a beautiful Canva template. And I’m not throwing shade. I mean, I am one of these finfluencers. The problem is that many in this industry aren’t financial experts and shell out a bunch of trash finance tips. Even worse is that the trash tips are oftentimes to ones that go viral. They make you think to yourself, “OMG that makes so much sense! Why didn’t I think of that?!” And I hate to be the one to break this to you, but if it were as easy to get rich as some finfluencers make it seem, we would all be rich.
If you want to actually start making progress on your financial journey, you’re going to have to stop believing the trash tips and start getting educated by real experts. To help you weed through the nonsense and find the good stuff, here are 3 very popular and very bad pieces of financial advice you may have been finfluenced by.
Invest in the Companies You Buy Products From
Hindsight is Always 2020
There are so many examples of posts that say things like, if you had invested $399 in Apple in 2001 instead of buying an iPod it would be worth a bazillion dollars today. The problem is that in 2001 we had absolutely zero clue that Apple would become the dominating force that it is today. Here are just a handful of the things that have grown Apple into the behemoth it is but didn’t exist back in 2001.
- The iPhone
- The App Store, which charges 30% to creators for most in-app purchases, subscriptions, and paid downloads
- The Apple Watch
- And so. much. more.
20 years later, of course, we can easily say how great of an investment it would have been to buy Apple stock back in 2001, but it was a much riskier investment back then. As they say, hindsight is always 2020, and that’s the reason these posts never tell you which company is the Apple of today and will be a dominating force 20 years from now. Because they have absolutely no clue.
Purchases and Investments Are Not Created Equal
Another reason you shouldn’t base your investment portfolio on companies you buy products from is because you don’t buy a product for the same reason you invest in a company. Let’s break down the difference between why you buy a product vs why you buy a stock.
Reasons for buying a product
- It will make your life easier
- It makes you happy
- It’s functional
- You look damn good in it
- And a million more reasons
Reasons for buying a stock
- It will make you money. Period. End of story.
A company making a product you love doesn’t automatically make that company a good investment. I mean, everybody loved Blockbuster in the 90s and probably thought that was a great investment, but we know today that it wasn’t. Having a great product doesn’t equal longevity or good accounting practices, and therefore doesn’t always make the companies behind your fav products good investments.
On top of that, there are so many behind-the-scenes companies we don’t know the names of that are critically important to our lives and make great investments. These can be logistics companies, semiconductor manufacturers, foreign companies, marketing firms, you get the picture. There’s a whole world of companies that aren’t consumer-facing but are making lots of money and are great investments. If you only focus on investing in the companies you know the names of and buy products from, you’ll miss out on tons of great investment opportunities.
Dividend Stocks Are a Great Source of Passive Income
It’s true what the posts say. Warren Buffett makes millions of dollars every year investing in dividend stocks. But he’s a BILLIONAIRE. If you’re reading this, I’m going to go out on a limb and assume that you’re not a billionaire, which means that you shouldn’t be investing like Warren B.
The reason Warren earns so much passive income from dividends is because of the massive amounts of money he has invested. The average dividend yield of the S&P 500 is only 2%. That means to earn the average median household income of about $70,000/year, you’d need to have $3,500,000 invested in dividend stocks. That’s a lotta dough.
And sure, some companies offer double-digit dividend yields, but you’ll miss out on a ton of earnings if you use your dividend payouts as passive income instead of reinvesting them. Check out this post @personalfinanceclub did on how much more money you can earn by reinvesting your dividends instead of using them as income.
A whopping 68% of the total growth in this example was made by reinvesting dividends. And I know the thought of just investing some money and living off of the dividends sounds great, but to do that, you need to have a ton of money invested. To get that much money invested, you probably need to be reinvesting your dividends. So skip trying to use your dividends as passive income and focus on the growth of your portfolio instead.
Invest in Aggressive Funds in Your 401k
This one isn’t really a finfluencer problem, but it’s a huge problem nonetheless because one of the most popular investment accounts is the 401k.
Contributing to your 401k is absolutely fabulous. You get tax benefits and many companies will match your contributions, which is an easy way to get a non-performance raise. The problem is that some of the funds marketed to you in your 401k can be better at persuading you to invest in them than they are at actually making you the returns they promise. Here’s how to spot the fakers.
The main thing to look for is whether the fund is actively or passively managed. Actively managed funds in your 401k look super fancy and claim that they’ll make you a lot more money. What they don’t tell you is that they have much higher fees, AKA expense ratios. This is the fee you pay to cover the fund’s operations and management expenses, and the higher the fee, the lower your return.
When the returns of actively managed funds were compared to the return on the S&P 500, 85% underperformed the S&P over 10 years, and a whopping 92% underperformed the S&P over 15 years.
So while these funds promise sky-high returns, they usually don’t achieve them after you factor in their astronomical expense ratios. And since you’ll most likely be leaving your investments in your 401k for over 15 years, you could easily fall victim to making less money by investing in these funds. Instead, invest in passively managed funds with much lower expense ratios to see better returns over the long term.