Diana Clement: Busting 10 myths about creating wealth

If your long-term financial plan is based on timing, you'll lose out sooner or later. Photo / Kenny Rodger

Boom and bust is what happens. Those few people who do get rich quickly are very smart. The human brain is prone to to a bit of delusion. When it comes to money people fall for all sorts of common fallacies. Sometimes these fallacies are so ingrained that they trot off the tongue without a thought.

How often have you heard "you get what you pay for" or "you can't get a safer investment than bricks and mortar"? Too many people fail to question their norms - to their own financial detriment. Here are 10 examples:

1. Credit card debt is normal. "How much credit card and personal loan debt do you have?" It's a typical everyday question, which pre-supposes that being in credit card debt is the norm. Modern ideology has changed the way that people view credit. Some assume that the money up to and including the credit limit is their money, not debt. So they spend up to the limit every month.

I've taken to reading the Trade Me message boards to keep up-to-date with how the average man or woman in the street views their personal finances. The lengthy discussions on subjects such as which balance transfer is better than the other miss the point that ongoing credit card debt reflects poor financial management.

2. The Government runs KiwiSaver. It only takes a quick perusal of the Trade Me message boards to see there is a huge amount of misunderstanding about KiwiSaver. Many people have no idea that the money is held by private companies. They think the Government has their money. For example, "northguy" wrote: "Im not in Kiwisaver - I dont trust the Govt not to pinch it after what happened last time NZ had a scheme like this." The Government hasn't got the money to take. The Inland Revenue Department passes the money to private companies such as Westpac and Gareth Morgan KiwiSaver.

Some of the fallacies about KiwiSaver spouted on Trade Me are real eyebrow-raisers. One person said Bridgecorp and Hanover were "proof" that KiwiSaver is a "rort". He clearly couldn't tell the difference between finance companies and fund managers - although they offer completely different financial products. Another common misconception is that KiwiSaver is government-guaranteed. It's not. Yet another one is that KiwiSaver money dies with you or gets swallowed up by the Government. It doesn't. It is paid to your estate on death.

3. I'll never live to retirement age. This is common among people in their 20s and 30s who are in the best position to start putting a secure retirement in place. It's so much easier to build up a decent nest egg from a young age thanks to compound interest. Most of us do make 65 and many regret not having started saving when young.

4. It's not possible for everyone to save. Suggesting that even people on low incomes should be saving can draw hostile online responses. Yet just as many low earners will also point out that they save - by not mistaking wants for needs. People do save on low incomes and buy houses. At least the smart ones do.

5. You get what you pay for. This is often an excuse for spending too much and breaking the bank. For example, a $50 perfume is probably better than one from the $2 shop. That's not to say that a $500 perfume is that much better than the $50 one to be worth the premium. There are a million and one excuses to spend money and buying the most expensive of everything because "you get what you pay for" is one.

6. Shares are too risky. If I had a dollar for every time I've heard this my retirement fund would be healthy indeed. Shares do have risks associated with them, but so do all investments. The people who refuse to invest in shares usually do so because they don't understand them.

Buying shares involves acquiring a small portion of a company. Some companies are riskier than others, but that's not to be confused with volatility. Volatile investments that go up and down aren't necessarily risky. Ups and downs are quite different from failure.

The way to mitigate risk that an investment might fail is to spread your share investments across a number of companies that operate in different industries, such as construction and healthcare, and in different countries. Having overseas shares in your portfolio spreads the risk geographically. Or, for ease, buy managed funds, which spread your risks for you.

7. You can time markets. New and overly exuberant investors sometimes try to time markets. They may, for example, have sold out of the property market in 2006 or 2007, thinking that prices would fall and they'd buy back in at a profit. The same happens with shares. Their shares hit what appears to be a peak and they sell waiting for the market to fall. It doesn't always happen. Markets confound even the most experienced economists and financial analysts. You can sometimes "time" markets once. The reality is that you've lucked in. If your long-term financial plan is based on timing, you'll lose out big time, sooner or later.

8. You can't beat bricks and mortar as an investment. In the middle of the last decade you couldn't attend a barbecue without someone raving on about house prices and/or the money they'd "made" by investing in property. More than a few are nursing bad investment hangovers at the moment. That's because it's a common delusion during bull markets that the market will continue to rise forever. This isn't the case. Markets overshoot and eventually have to return to the norm. The trouble is that the credit crunch intervened, meaning that banks weren't willing to lend as freely and, even worse, changed the debt-to-equity ratio required from clients. Some demanded that investors who were overly indebted lower the ratio, which they couldn't.

Many investors need their tenants' rent simply to make ends meet at the end of every month, which as Christchurch investors can tell you, doesn't always happen. It takes something unforeseen such as an earthquake or market crash to bring home the fact that bricks and mortar investments come with risks. It's also worth remembering that just because a house goes up in value over time you haven't necessarily "made money". Inflation erodes these gains over time.

9. You "invest" in a car. This one is a myth. Cars go down in value, not up. Nor is buying a nice car going to make you more successful in life and pay off that way. The only possible exception is someone who is seen out and about in their car, such as a real estate agent, who wants to look successful. Not that I would choose an estate agent based on his or her car. I'm more interested in whether he or she is honest first, and a good salesperson second.

10. You can get rich quick. Every decade there is the new magic bullet. It may be technology shares, apartments, forestry or even llama farming. Boom and bust is what happens. Those few people who do get rich quickly are very smart.

They may invent something or start a very clever business. They don't get rich by following the crowd to the latest trendy investment. History tells us that.