Ep43 Examining Bad Investment Advice

Ep43 Examining Bad Investment Advice

Mortgage Refinancing

  • Suze Orman's advice against refinancing a mortgage at a lower interest rate due to a longer mortgage term is flawed.
  • Refinancing at a lower rate without fees always benefits the borrower by either paying off the mortgage sooner or saving money on payments.

Stock Dilution

  • Buying stocks before a company issues new shares does not lead to dilution if the new shares are issued at fair value.
  • Dilution occurs when new shares are issued at a discount or when a company loses money and needs to issue new shares to raise capital.
  • Issuing more shares does not cause stock dilution; it is the loss of money that leads to a lower share price.
  • In venture capital, dilution refers to issuing more stock at a lower price due to fundamental reasons, not because of the stock issuance itself.
  • Dilution of voting rights may not always be negative as it can attract investors who add value to the company.

Dollar-Cost Averaging

  • Dollar-cost averaging, which involves investing a fixed amount at regular intervals, ignores the principle that a dollar in the market is equivalent to a dollar in your pocket.
  • Dollar-cost averaging may make sense if returns are predictable and correlate with the investment rule, but for most investors, returns are unpredictable, making this strategy suboptimal.
  • The intuition behind dollar-cost averaging, that gradual investment reduces risk, is flawed as risk aversion should be assessed at the point of full investment, not during the process.

Investment Strategies

  • Putting all money in the market is not always the best strategy, even if the desired risk level is lower.
  • Time diversification, where money is invested slowly over time, is not effective if returns are not predictable.
  • Diversification across stocks reduces risk, but time diversification does not cancel out risk.

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