Gospel or Just Old Sermons?

The best financial advice is the most obvious advice.

Isn’t it?

Over the last couple of decades, a number of very basic guidelines for financial planning and money management have become gospel--repeated over and over again as sage advice in books, the media and, of course, by many investment advisors.

But if everyone blithely believes in a particular financial strategy, can it still be valid? Perhaps--but with some caveats, as the following evaluations of five popular financial truisms will show:

1. To determine how much of your investments should be in stocks, subtract your age from 100, then invest that percentage in stocks. The rest should be in more stable bonds or cash accounts.

It’s a handy rule of thumb, but it may be far too simple for most people.

First of all, it ignores the single largest asset class for most Americans--real estate, meaning their homes. If you consider your home a fairly conservative and stable long-term investment, shouldn’t that allow you to be more aggressive with your other investable long-term funds?

Also, for people in their 20s or early 30s, who potentially have a very long-term time horizon, there’s a good argument that virtually all of their investable dollars belong in stocks, rather than just 70% to 80%.

The real issue is time. If you need your money soon, it shouldn’t be in stocks. But if you have 20, 30 or 40 years, it’s hard to argue against stocks, versus bonds or cash.

2. Stocks will return about 10% annually over the long run.

Both bulls and bears love this truism. The bulls use it to justify investing heavily in stocks. The bears use it to predict a period of very low stock returns. From the bears’ point of view, in other words, because stocks returned about 17% a year between 1980 and 2000, while the average annual return since 1930 has been 10%, the market’s returns should drop well below 10% for an extended period, to keep the long-term average in place. (Actually, adjusted for inflation, real returns in the stock market are closer to 8%, but that’s besides this point.)

Is the glass half-full or half-empty? The bears’ mantra of “regression to the mean” sounds logical (and scary) enough. But it’s not at all certain that 10% is the “normal” return on stocks, some analysts point out. That figure may well be too low, because it includes the Depression-era returns, or non-returns, such as they were: From 1927 through 1944, the market’s annual return was a mere 5.5%.

And maybe in the future the world’s businesses will be more productive and equity returns will be very high, in the process lifting the long-term average well above 10%?

3. Older people need to think more about capital preservation than capital appreciation.

To a certain extent, this is true. But unless your days are clearly numbered, even at age 65 you may not want to turn too many of your growth investments into more conservative income-producing investments.

People are living longer than ever before, and odds are you will too. If at 65 you live another 30 years, you will need a good portion of your nest egg to continue growing, rather than simply throwing off fully taxable income while your principal amount withers or stagnates.

4. You will need 80% of your final income to live comfortably in retirement.

Well, sure, 80% would be nice. But “need” is a fuzzy thing. Plenty of people spend far less in retirement than in their working years, whether by necessity or plan.

For example, all of your major expenses may fall sharply when you retire. You may be able to cut housing costs by half if you choose to move to a cheaper locale, for instance.

Other costs may be higher, including medical and travel. But overall, the idea that you must save a fortune now--and that Social Security payments will be too small to be worth much in retirement--may be exaggerating what will be reality for many people when they get older.

5. Always pay off large credit card debts before doing anything else with your money.

This one seems hard to argue with: Where else can you get a 9%, 14%, even a 21% guaranteed, tax-free return on your money? In effect, that’s what you get when you pay off those credit cards. On the other hand, if you are in a 401(k) or similar savings plan, and your employer matches 100%, 50% or even 25% of your contributions, that is a better return, at least on the face of it. The point is, debt isn’t necessarily bad--you just have to manage it. Paying down heavy debts makes sense, but perhaps not at the expense of completely eliminating your savings program.