Editor's note: This is part three of a four-part series exploring financial fact vs fiction. Each article examines five of the top 20 most common financial myths — from investments to retirement and Social Security to life insurance. Parts one and two — This Roth Conversion Myth Could Cost You and Why Your 'Magic Number' Isn't Actually Magical — covered the first 10.
Have you ever heard one of your relatives or friends opine about their favorite investment or way to reduce income taxes and wonder to yourself: "Is this really true?"
This series of 20 most-common financial myths might help you sort out the fact from fiction, or "urban legends," when it comes to investing and consumer finance.
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Without further ado, here are myths 11-15:
11. Adding bonds to a stock-oriented portfolio protects my downside during market sell-offs.
At times, bonds do move inversely with stocks, so when stocks are selling off, bonds may rise in value to cushion overall returns in a balanced portfolio.
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But that isn't always the case, and, in fact, stocks and bonds have moved in the same direction many times recently, which is what practitioners refer to as positive correlation.
This occurred in the 2022 calendar year, which was damaging to the traditional 60/40 stock/bond portfolio because the S&P 500 Index experienced an 18.1% loss, and the Bloomberg US Aggregate Bond Index lost 13.0%, according to Callan Institute's Periodic Table of Investment Returns.
Some economists and market watchers believe the higher-rate, higher-inflation regime we're currently in may produce more periods of positive correlation between stocks and bonds, similar to the 1970s-'80s period.
Another related misconception is that all bonds move together in the same direction. That's not true either. In 2008, the 10-year U.S. Treasury bond return was +20.1%, while the Bloomberg US High Yield Corporate Bond index return was -26.2%, a difference of 46.3 percentage points in a single year!
It's important to understand why this can happen. During 2008, a debt crisis unfolded, kicking off the Global Financial Crisis, or GFC. Investors, scared by how quickly the economy was deteriorating, bought U.S. Treasuries as a safe haven, the so-called flight-to-safety trade.
High-yield bonds, aka junk bonds, went the opposite direction because during recessions, highly leveraged companies have difficulty making their debt payments, and high-yield bond defaults tend to rise.
12. When I die, my assets will be distributed to the heirs I list in my statutory will.
Although some assets can indeed be distributed according to the statutory will, many assets do not pass by will but, rather, pass according to beneficiary designations, right of survivorship or terms of a trust.
That's why it's critical for investors to understand how each asset they own will pass to heirs when they die and make sure their beneficiary statements, trusts and similar designations are up to date.
Assets requiring a beneficiary designation will be distributed to the primary or contingent beneficiaries designated on the most recently signed and filed beneficiary form.
This category includes life insurance policies, annuities, traditional and Roth IRAs, SEP and SIMPLE plans, 401(k) plans, 403(b) plans, 457 plans and other retirement or pension plans.
Assets in individual (nonretirement) brokerage or bank accounts do not generally have beneficiary designations, but they can if the owner adds a TOD (transfer on death) or POD (pay on death), respectively, to those accounts.
Revocable living trusts (RLTs) are used by many families to own assets such as real estate to keep those assets from going through probate, which can be costly, public and slow.
If a family has an RLT that owns their primary home, a vacation home, a couple of rental properties, an RV, a boat and their business, all these assets will be distributed according to the terms of the trust when the trustee passes away.
Many types of irrevocable trusts are used in estate planning also, generally providing their own distribution instructions for how assets owned by the trust are to be distributed when the trustee dies.
Finally, many assets are owned jointly by a married couple or partners, as either joint tenancy with right of survivorship (JTWROS) or joint tenants in common (JTIC).
These forms of ownership dictate what happens to the asset on the death of a joint tenant/owner, namely that the surviving tenant/owner now owns 100% of the asset after their spouse or partner's passing.
So be careful — signing and updating your will may not control distribution of many or even most of your assets when you die.
13. Now that inflation has dropped significantly, prices are coming back down to where they were in early 2021, before the inflation spike.
Prior to 2021, the inflation rate was running at only 1% to 2% annually for over a decade, making gradual price increases almost invisible to many consumers.
But as 2021 and 2022 played out, inflation spiked to 9.1% by mid-2022, causing prices for groceries, clothes, appliances, lumber, cars, food and houses to rise significantly.
Most consumers noticed these price increases, which resulted in costs for many items U.S. consumers purchase regularly jumping by about 30% within a short two- to three-year period.
By mid-2023, the inflation spike had receded back to 3% or so, with inflation declining almost as rapidly as it had risen.
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As 2023 came to an end, many consumers were expecting prices at the grocery store and restaurants and top vacation destinations to return to their early-2021 levels, but they didn't.
That's because the inflation rate refers to the rate of change of prices, not the absolute level of prices themselves. An annual inflation rate of 3%, for example, means prices increased by an average rate of 3% during the year, so by year's end, prices are 3% higher than they were at the beginning of the year.
If inflation then dropped to 0% the following year, price changes (i.e., inflation rates) are now flat for the second year, but still 3% higher than they were two years prior.
For prices to drop back to their starting point, the economy would need to see price deflation, meaning a negative rate of inflation (i.e., a reduction of the price level).
Barring deflation, which is unlikely in the next year or two, U.S. consumers are unfortunately stuck with the higher prices associated with the 2021-'22 inflation spike.
That says nothing of the potential inflationary aspect of higher import taxes, aka tariffs, which threaten to raise prices consumers pay by increasing the costs paid on imported goods.
14. The U.S. imports most of its oil from the Middle East (OPEC countries).
In fact, Canada and Mexico are the top sources of U.S. crude oil imports, accounting for about 75% of all oil imported to the U.S. each year.
Saudi Arabia is No. 3 and Iraq No. 7, providing roughly 7.7% of the annual imported total, according to Reuters, based on U.S. Energy Information Administration data.
In 2024, the U.S. produced more crude oil than any other country — about 13.3 million barrels per day. But the type of crude oil the U.S. produces isn't always usable by its own refineries, which is why the U.S. still imports part of its annual supply of oil while, at the same time, exporting some of its own nationally produced crude oil to other countries.
U.S. refiners prefer use of heavier crude oil, but some of the oil produced in the U.S. is light, sweet crude oil, which is generally not compatible with U.S. refining capabilities.
Interestingly, the U.S. is also the world's largest exporter of liquified natural gas (LNG), sending nearly 93 million metric tons to other countries in 2024.
15. Owning real estate is the 'best' way to build wealth because property values increase significantly over time.
While it's true that real estate can be a good investment and does enjoy certain tax advantages, from a pure rate-of-return perspective, it's not always the clear leader as compared to other investments (e.g., U.S. stocks, private equity).
Using the S&P CoreLogic Case-Shiller U.S. National Home Price Index as a proxy for residential home price appreciation reveals an average gain of +4.4% per year over the past 38 years, according to the Federal Reserve Bank of St. Louis.
Drilling down to individual cities, the Case-Shiller Home Price Indexes show the dispersion across various geographies, with average New York City home prices rising +3.6% annually, Chicago +3.7%, Boston +4.0%, Los Angeles +5.3% and San Francisco +5.5%.
Over that same 38-year period, U.S. stock prices have risen an average of +10.5% a year, roughly double the home appreciation rate of Los Angeles, one of the fastest home price growth markets during this period.
To compare private equity and venture capital returns, we employed Cambridge Associates' U.S. Private Equity (PE) and Venture Capital (VC) indexes spanning the past 25 years and compared those returns to the various Case-Shiller Home Price Indexes covering this same 25-year period.
The Cambridge Associates indexes show average annualized PE returns of +12.7% and VC returns of +12.0%. Using Case-Shiller Home Price Indexes over this same period resulted in average annualized home price appreciation of +4.9% nationally — +4.8% for NYC, +3.1% for Chicago, +5.1% for Boston, +6.2% for Los Angeles and +5.3% for San Francisco.
Similar to U.S. stocks, PE and VC returns roughly doubled the home price appreciation rate of Los Angeles and more than doubled the rates of other cities and the national average.
Our point here isn't that real estate is a "bad" investment — it's not — but that home values may not keep up with compound annual growth rates of stocks and PE/VC investments.
Diversification works, and blending real estate with stocks, both public and private, can be a solid, productive and responsible investment strategy for many families.
Besides, we all have to live somewhere, so why not own an appreciating asset that also provides shelter and security for your family?
While some basic principles ring true forever, many "urban legends" of finance don't; in fact, they never did. It's a good idea to research truisms to verify just how "true" they really are. Otherwise, you could be making costly mistakes.
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