You will have heard lots of wise sayings, where your finances are concerned, but there are some instances where traditional rules do not apply. With information bombarding you from all directions, such as newspaper articles, personal finance websites and podcasts, it can be hard to break through the noise and discern what is correct for your situation.
We take a look at some of these so-called rules in more depth and see which ones you can choose to disregard.
Cash is king
Whilst it is a good idea to keep some cash available for your current needs, it is not the best rule to follow if you want to be fully invested. Admittedly, there are some people who like to have cash at hand to take advantage of impromptu investment opportunities, but it is exceptionally difficult to time the market successfully and consistently.
A more reliable rule is that equities perform better than bonds and cash, in the long run. So if you keep a large amount of your portfolio in cash, you could be missing out on high returns. It is important to consider the correct asset allocation for you, how easily you need to access your money, your attitude to risk and the return you are expecting.
You are more likely to maximise your investment returns by being fully invested in a diversified portfolio across multiple asset classes, rather than storing it all in cash.
Debt is bad
This is a common belief, but in fact it is uncontrolled debt that is bad. Sometimes a certain amount of planned borrowing can be sensible, especially when interest rates are low, as long as you only ever carry a level of debt that you can comfortably repay.
Think about mortgages, for example. With current mortgage rates at about three per cent, borrowing a modest amount of money could make sense, even if you are able to buy a home in cash outright. It frees up money for other projects and prevents you from tying up all your cash in one asset. Similarly, rather than paying off a mortgage, it may be better to retain a small level of borrowing and invest your money in other assets that generate a return.
As mortgage interest remains tax deductible in most cases, it enables you to reduce your tax liability and enjoy greater financial flexibility at the same time.
Use multiple financial advisers to enhance diversification
You may think the old adage, two heads are better than one, applies when it comes to financial advice and decide to use several financial advisers, in an attempt to increase the diversification in your portfolio.
However, while allocating assets across a broad range of funds does enhance diversification, using multiple advisers often just leads to confusion. It is much better if you adopt a unified approach to your financial advice, so that you and your adviser have a clear overview of all your investment activities. That way you are able to make sure you are on track to meet your objectives. Without such a unified approach, you run the risk of experiencing tax problems, conflicting strategies and issues with capital gains.
It also means you could end up paying significantly more in fees overall, for little or no advantage. Perhaps it is time to revisit the rules you are following and check you are on track to meet your objectives. The value of your Investments and the income from them can go down as well as up