Top 10 Myths in Personal Finance

There are some persistent myths in personal finance that lead people to make objectively bad financial decisions. For example, you should save as much as possible when you're young to benefit from compounding. It's some of the most foundational advice in personal finance, but it's wrong, or at least it's incomplete. I'm going to explain why and debunk nine more myths like this one to help you make better financial decisions. I'm Ben Felix, Chief Investment Officer at PWL Capital, and I'm going to tell you about the biggest myths in personal finance. You should save as much as you can when you're young to benefit from compounding is taken as an absolute truth in personal finance. It sounds sensible enough, and like many myths, does have elements of truth. A longer time horizon makes compound interest more powerful, and to be sure, compounding is an important tool for building wealth at long horizons. But this strategy neglects an even more important consideration. When you're young, your income is, in the vast majority of cases, at its lowest point, and will likely steadily rise over time as your career progresses before tapering off as you approach retirement. Similarly, when you're young, it's likely that your standard of living will be at its lowest point when compared to your peak earning years and retirement. At this stage, the marginal utility that's like the amount of additional satisfaction you can generate of every dollar you spend on improving your standard of living is at its highest. An additional $5,000 or whatever spent at age 25 may mean living in a safer area, eating better food, getting a better education, driving a more reliable car, or forming core memories and experiences that you will carry with you forever. At age 45, that $5,000, even when you account for the potential investment growth in the interim, yields a much smaller increase to your standard of living. That means if you're saving as much as you possibly can when you're young, when your income and standard of living are comparatively low, you are sacrificing more of what matters when you can least afford it. You're effectively robbing from the poor, your current low income self, relatively low income self, and giving to the rich, your future higher income self. Another way to think about this is that money is not the only thing that compounds over time. Skills, experiences, and health compound too. Focusing only on wealth accumulation misses the bigger picture. This idea comes from one of the best supported models in economics called the life cycle model or life cycle hypothesis. The fundamental premise of the life cycle model is that people want to maintain a consistent standard of living throughout their lives. That consistent standard of living is really the key to the model. The life cycle model suggests that you should aim to roughly even out your standard of living across high and low income years. This is called consumption smoothing. Since income typically starts low when you're young and rises throughout your career, your saving strategy should match that pattern. Save what you can early on without sacrificing quality of life or strategically use leverage if your risk profile allows, I'll come back to that later, then increase your savings as your income grows. There's a lot more to unpack here like risk management and habit formation but getting deeper into that I think needs a dedicated video. When you model this out calibrated to someone living in the United States it's possible to show that it's optimal for people to start saving later in life when their income is higher rather than stressing themselves out when they have to choose between saving and eating good food or whatever other trade-offs they might be making. Don't get me wrong here, saving is certainly important and so is making sure that your spending isn't frivolous, but the strict idea that you need to make sacrifices early in life to have a good long-term financial outcome is a myth. Economic growth is good for stock returns. The news media love to highlight economic data and investors love to follow it. GDP growth, unemployment, retail sales, and the ever-coming recession and so on. Bad economic news and data tend to make investors nervous. I can't tell you how many times I've had people ask whether they should get out of the stock market or delay investing cash they have on hand due to some economic headline or expectation. The opposite is also true. Investors look at a sector like AI today or a country like China maybe 15 years ago and imagine how much economic growth there is going to be and infer from that expectation that high stock returns will follow. I can't tell you about the future of AI yet but we do know how investing in China has worked out. The problem is that the stock market is not the economy. The stock market prices forward-looking expectations. Stock prices represent expected future cash flows generated by real businesses. By the time you're reading about economic news or hearing about the growth potential of a market, it's highly likely already reflected in high stock prices. Historically, this has been true at the industry level and the country level. The countries with the highest economic growth tend to counter-intuitively produce slightly lower average stock returns and many exciting industries have grown large but produced poor stock returns, while boring industries that nobody thinks about have produced higher returns. The most reasonable statement to make here is probably that expected economic growth and realized future stock returns are unrelated, which makes focusing on economic data and economic growth forecasts a pretty futile exercise for investors. Dividends explain 40% of the stock market's historical returns. This argument is often used by dividend investors to explain why focusing on dividends is important, but its fundamental premise gets causation completely backwards. When a company pays a dividend, its returns are not increasing, they are changing in character from capital to income. The amount of the dividend income that you receive reduces the capital value of the stock that you own roughly one for one. You end up with less capital and a dividend payment to make up the difference, but the only thing that has changed is the characteristics of what you own, not your return. What really matters is the underlying fundamental characteristics of the companies, not whether they pay you a dividend. The fact that companies do pay dividends splits total market returns into a combination of capital and income, but it's not correct to say that dividends explain or deliver stock market returns. At best, they describe them. An interesting example is comparing a dividend-focused ETF and a buyback-focused ETF. Both of these funds have similar-ish factor exposures, which is not surprising. Companies that pay dividends and companies that buy back stock are both returning capital to shareholders. It makes sense that they would load on the value, profitability, and investment factors, which basically just means they're companies with lower prices, more robust profitability, and more conservative reinvestment than the stock market average. Despite those fundamental similarities, the companies focused on buybacks have a lower dividend yield and they have outperformed the dividend payers. Index funds only give you average returns. This is typically the setup for telling you that some other investment strategy can give you above average returns by being different from the index. But for two reasons, index funds deliver returns much higher than the average fund that tries to beat the index. One reason is the skewed distribution of individual stock returns. Most stocks perform poorly, while a few perform incredibly well. You're far more likely to pick a losing stock than a winning one and missing the big winners makes it very difficult to match the return of the overall market, let alone beat it, by selecting a subset of stocks. The other issue here is fees. The average index fund fee is a fraction of the average actively managed fund fee, which shifts the whole distribution of expected fund returns in favor of index funds. When we look at the data, this is exactly what we see. The vast majority of actively managed mutual funds underperform indexes and index funds by a wide margin. The asset-weighted average actively managed U.S. equity mutual fund in the United States returned an annualized 9.41% for the 20 years ending December 2025, trailing a U.S. equity index ETF by well over one percentage point. The crazy thing is that the index fund would be easily in the top quartile of actively managed funds. So no, index funds don't just give you average returns, they give you top quartile returns and they do it without taking on the risk of future underperformance. Do you know what percentage of top quartile actively managed funds remain top quartile five years later? Zero percent. None of them. But index funds keep on trucking along, delivering the market's return, which as I have mentioned is way above the average active fund. That doesn't mean there won't be outlier active managers over long periods of time in the future, they will always be there even if it's just explained by luck, but their historical track record doesn't tell you much about the future. This next myth is coming up a lot right now. Future market returns are always low when the Shiller Cyclically Adjusted Price Earnings Ratio, or CAPE, is above 40. The Shiller PE is a measure of stock market prices scaled by the trailing 10-year smoothed real earnings. It's basically a way of measuring how high stock prices are relative to an expectation of future earnings anchored in history. When the number is high, you're paying more for expected future earnings and your expected returns are lower. There is some truth to the myth, which I'll explain, but I think the real myth is the level of conviction that is often ascribed to the data and how the information is used. It's often used to sell some other investment product or to discredit index funds. If you only look at the U.S. stock market, there has been a relationship between stock market valuations and future returns. The Shiller PE has only exceeded 40 a few times in U.S. market history, all concentrated around the dot-com bubble and today. Based on how the dot-com bubble played out, that seems scary, but there just isn't enough U.S. historical data to be sure that high CAPE ratios mean there will be low future returns. It's possible that future earnings will be really high, or that the CAPE ratio can get even higher than it has been in U.S. history. The small sample problem is tough to solve within the U.S. because we can't create more historical data to test, but one approach is looking outside the U.S. It's not perfect because cross-country CAPE ratios aren't necessarily comparable to each other, but I think it's still informative. I looked at 10 developed markets from 1982 through the end of 2024 and sorted the future 10-year stock returns at each point on their starting CAPE ratio. The relationship is still there. Higher starting valuations lead to lower realized returns on average, but there can be periods where future returns are still high when the starting CAPE ratio is around 40. Market timing is just hard. Another problem with operationalizing these data is highlighted in a 2017 paper in the Journal of Investment Management. The authors show that while there has clearly been a relationship between stock market valuations and future market returns, a valuation-based market timing signal based only on the historical data available at the time, meaning that as in real life, the timing strategy does not know what future market valuations will be, that strategy produces lackluster results. The authors explain the reason is that market valuations can drift up over time. What was expensive in the past becomes normal, or at least less expensive in the future, leading the market timing strategy based on historical valuations to be under-invested in stocks during periods of strong performance and rising valuations, which is what has happened in recent history. I think it makes sense to be aware of market valuations and at PWL Capital, we do incorporate them into the expected returns we use in our financial planning process with clients, but we do not use them as a market timing signal or as a reason to invest in private equity and private credit and hedge funds. Warren Buffett proves that you can beat the stock market by picking stocks. Let's be clear here, Warren Buffett did beat the market through the entirety of his career as a professional investor, largely due to incredible early performance. However, he did not beat the market or a Vanguard U.S. stock market index ETF for more than 20 years leading up to his retirement as the CEO of Berkshire Hathaway in January 2026. Despite this, Buffett and his highly quotable investing wisdom are often used to justify picking stocks as a viable investment strategy for casual retail investors and active fund managers alike. But Buffett himself was a huge advocate of investing in low-cost index funds due to the challenges with beating the stock market over long periods of time. In his 2016 letter to shareholders, Buffett does acknowledge that there will be some successful active managers. He says there are of course some skilled individuals who are highly likely to outperform the S&P over long stretches. In his lifetime though, he has identified early on only 10 or so professionals that he expected would accomplish this feat. 10 or so in his lifetime is not exactly a vote of confidence, chances are you are not one of those people or one of the few thousand he says might exist that he has not met yet. Buffett concludes this section of the 2016 letter with this. The bottom line, when trillions of dollars are managed by Wall Streeters charging high fees, it will usually be the managers who reap outsized profits, not the clients. Both large and small investors should stick with low-cost index funds. Bonds and cash are safe investments. When investors get nervous about the stock market, they'll often consider moving into bonds or cash to reduce risk. This also happens around retirement where retirees will hold large cash allocations to reduce risk. And in long-term asset allocation decisions where investors allocate a large portion of their investments to bonds, again, to reduce risk. I think the safety of bonds and cash is misunderstood. They certainly tend to be less volatile than stocks. This means they don't fluctuate in value as much as stocks when you log into your investment account each day to check your account values. Volatility is one measure of risk, and an important one, but what really matters to long-term investors is being able to put food on the table throughout retirement. The 2025 paper Beyond the Status Quo, a critical assessment of life-cycle investment advice, uses Block Bootstrap, a method for simulating hypothetical data from historical data, to simulate 1 million investor life cycles for an American couple who save and invest through their lives and then follow the 4% rule to spend from their portfolio in retirement. The historical data source for the simulations includes 39 developed countries, with data going as far back as 1890 and through 2023, spending more than 2,600 years of country-month return data. The authors establish an optimal 100% equity portfolio allocated to approximately 33% domestic stocks and 67% international stocks by testing a whole bunch of different possible allocations to domestic stocks, international stocks, bonds, and bills, which is like a cash equivalent. The tests evaluated wealth at retirement, retirement income, conservation of savings through retirement, and bequest at death. Illustrating the risk of bonds and cash for retirees, the authors show that bills, which are similar to cash, balanced 60% domestic stock and 40% bond portfolios and target date funds all produce less wealth at retirement, a lower income replacement rate, a higher probability of ruin based on the 4% spending rule, and less wealth at death than the all equity portfolio. Bonds and cash feel safe because their value is relatively stable, but they open up a whole other type of risk that's likely more damaging than volatility for long-term investors. Gold is an inflation hedge. The idea that gold is an inflation hedge comes from, I think, two main sources. One is the fact that gold has roughly held its value in real terms over extremely long periods of time. And the other is the fact that for a brief period of time in history, some major currencies, including the U S dollar were backed by gold. And some people just can't let go of the idea that gold is money and money should be gold. Let's address each one separately. It is true that Roman centurions were paid about the same in gold 2000 years ago as US army captains are paid today if their wages were converted to gold. That's pretty cool as an observation, but most people don't have 2000 years to wait and gold has been highly volatile in the intermediate term, far more volatile than inflation, making it very difficult to use as a hedge for anyone with a normal human lifespan or time horizon. Gold as the one true currency is more ideological than anything. There has been an ontological debate about what money is going back thousands of years. And it really comes down to who should control money. If money is a thing that rises out of the free market as the most convenient intermediate good in trade or the best medium of exchange, then it is intrinsically valuable and it should be left to the free market to control its supply and assign its value. This is roughly speaking the commodity theory of money. On the other hand, if money is an abstract idea based on mutual trust that ultimately relies on an authority to mediate it, the state should almost definitionally play an important role in how it's created and distributed. This is the credit or state theory of money, again, roughly speaking. If you want to believe that the government should have no role in money, I guess viewing gold as the one true measure of value does make sense. I'm not going to settle this ontological debate, which goes back at least to Aristotle's writing thousands of years ago and was also hotly debated in British Parliament in the 1800s during the bullionist controversy and the bank charter act debates, but at the very least we can say that gold being the true measure of purchasing power and therefore a perfect inflation hedge, comes from one theory of money and one relatively short period in history where major economies use gold to anchor the values of their currencies. The international gold standard operated for only about 4 decades before world war 1 and the US dollar's last formal link to gold ended when Nixon suspended gold convertibility in 1971. Today gold is held as a reserve asset by many central banks, but it plays no role in how monetary policy is conducted or in how mainstream theory explains the value of money. All that to say that both empirically and theoretically there is little basis to believe that gold is an inflation hedge. Renting a home is throwing money away. You guys know my thoughts on this so I won't spend too much time on it, but it can't be said enough. When you rent a place to live, you're paying rent in exchange for a roof over your head and keeping the capital you would have alternatively used to buy a home invested in other assets. When you buy a place to live, you're investing your capital into a real estate asset and saddling yourself with three costs that people often fail to fully account for. Property taxes, maintenance costs and depreciation, and the cost of capital. When you add it all up, both logically and empirically using historical data, renting and owning are approximately financially equivalent. In other words, if renters are throwing money away, owners are throwing it away too. With equivalence as a baseline, there are lots of things to consider in deciding whether renting or owning makes more sense for you, which I've covered in a recent video. Debt is always a bad thing to have. A lot of people, both individuals and certain high-profile professionals, who I will not name, are highly averse to debt. There's no doubt a psychological benefit to being debt-free. I think it's kind of like the other side of the coin of income investing. Not having to make payments is psychologically freeing in the same way that having cash flow from an investment is. Paying off consumer debt like credit cards and that line of credit that you use to take a big vacation you couldn't afford is almost certainly good advice, but not all debt is created equal. In theory and empirically, you can make a pretty good argument that people with high and stable future human capital and low financial assets should borrow to invest because their human capital is bond-like and their ideal equity allocation is almost certainly much larger than their available assets today. There's a 2013 paper in the Journal of Portfolio Management Diversification Across Time that argues that this is what people should do. The authors explain that a leveraged life cycle strategy, meaning a strategy that starts with leveraged stock allocation and gradually decreases leverage to ultimately become unleveraged near retirement, produces better retirement outcomes. They link their findings to foundational research from Paul Samuelson and Robert Merton, which recommends investing a constant fraction of wealth in stocks throughout your life based on your risk aversion. The author's argument is basically that if you have a few thousand or even a hundred thousand dollars to invest today, but your expected lifetime wealth is in the millions of dollars, you should be borrowing money to get as close as possible to having your intended lifetime allocation to stocks invested as soon as possible. The most interesting part of this paper to me is that the authors claim that by taking this approach you're taking less risk by what they call diversifying across time. They argue that people have too much invested in stock late in their life and not enough early on, and that an initially leveraged portfolio can produce the same mean wealth accumulation with a 21% smaller standard deviation. Leverage does absolutely need to be used judiciously, but the idea that there is an optimal use of debt in life cycle asset allocation makes a lot more sense to me than all debt being bad all the time. The other place this myth shows up is in homeownership. Owning a home outright with no mortgage is the lowest risk way to pay for housing, but it's also the most expensive. If we do a side-by-side comparison of an owner with no mortgage and a renter, the renter will almost always come out ahead financially, but it's a lot closer when the owner has a mortgage. The reason is simple, the cost of borrowing from the bank is a lot lower than the opportunity cost of having equity in a home rather than being invested elsewhere. Interestingly, research has found that mortgage debt is not a type of debt that leads to lower life satisfaction. This doesn't mean that you shouldn't pay off your mortgage, but it is important to understand the cost of doing so, which is at odds with the myth that all debt is bad. If you want to see me break down the most controversial topics in personal finance, you can watch that video here.