Five Great Financial Myths!

The financial world is complex and fast-moving, which explains why these five frightful fantasies refuse to go away.

Five Great Financial Myths! So many financial myths endure in the public consciousness. I'm going to slaughter five sacred cows by putting the following candidates to the sword. Here goes:1. We owe £1 trillionOur total personal debt (including mortgages) first exceeded £1,000 billion (a trillion pounds) in May 2004. However, three years on, we still persist in referring to Britain's 'trillion-pound personal debt'. In actual fact, by 30 April 2007, our debt mountain had grown to £1,325 billion. What's more, it's rising by over £100 billion a year, so it could well exceed £1.5 trillion before the end of 2008. Ouch!2. The average annual salary is £25,000The enormous incomes of the super-rich and City types distort the mean average salary. (The mean is the total salary pot divided by the number of workers.)In reality, a salary of £25,000 a year is a decent income for a full-time, male worker -- and most workers earn much less than this amount. For the record, according to the Annual Survey of Hours and Earnings 2006, median gross (before deductions) weekly earnings for all employee jobs were £351. Increasing this by, say, 4% to bring us into 2007 suggests that half of all workers earn less than £19,000 a year.3. Property is a better bet than sharesIt may come as a surprise to some people to learn that, since 1984, the FTSE 100 index of the UK's leading listed companies has outperformed the typical house price. All the same, as I explained in Property Versus Shares, the Footsie index has risen by 507% since June 1984, compared to a rise in the Halifax House Price Index of 487%. What's more, shares beat property every year from 1995 to 1999, with property gaining the upper hand from 2000 to 2004, before shares reclaimed the crown in 2005 and 2006. Note that this comparison doesn't take income (dividends and rent) into account.4. Stock-market investing is riskyPsychological research suggests that painful events create a deeper and longer-lasting impression than do happy occasions. Hence, millions of Brits look back fearfully at the stock-market slump of 2000 to 2003, when the FTSE 100 index more than halved from its peak to the pits. Sadly, many of these people forget the crucial subsequent outcome: that the Footsie has doubled from the low of 3,287 on 12 March 2003!Please, let's get one thing clear: investing in listed companies is not the same as buying a lottery ticket. If firms are well-managed, they should grow and prosper over the years, thus increasing the value of your investment. Furthermore, most medium and large companies pay dividends -- this income is usually distributed to shareholders twice-yearly.5. Fund managers can beat the marketThe City's greatest lie -- that fund managers beat the market as a whole -- was wholly refuted in an excellent book published in March of this year: The Little Book of Common Sense Investing by John C Bogle. In How To Become A Great Investor, my review of Bogle's masterpiece, I explained that it is a monstrous myth that professional investors can, on average, beat the stock market over long periods.As exploding this market myth would put hundreds of thousands of highly paid people out of work, we should expect it to continue to survive for the foreseeable future. In the meantime, only enlightened investors will see this self-serving untruth for what it is, and react by switching into low-cost tracker funds. For the record, my wife and I have great faith in 'cheap but boring' index-tracking funds and have backed our judgement with six-figure sums.Right, I'm off to lie down in a dark room until I've calmed down. I hope my opinions have opened your eyes -- feel free to rip apart my rant or suggest more financial myths by clicking on the "Give feedback" link below. Thanks for listening!