Personal finance is full of ideas that sound great in theory, but may not work well in practice. In this blog post, I will share with you some of the most overrated things in personal finance, and why you should be careful before following them blindly.

Early Retirement

Early retirement is the dream of many people who want to escape the rat race and enjoy life on their own terms. However, early retirement also comes with some serious drawbacks, such as:

• Lost Sense of Purpose. Work can provide more than just income. It can also give you a sense of identity, social interaction, and mental stimulation. Without work, you may feel bored, aimless, and unhappy.
• Increased Reliance on Market Returns. Retiring early means you have to rely on your investments for a longer period of time. This exposes you to more market risk and uncertainty. If you get unlucky with the sequence of returns, you may run out of money sooner than you expect.
• Fear Surrounding the Future. Retiring early also means you have to worry more about the future. You have to hope that nothing goes wrong with your health, the economy, or the world. You have less margin of safety and less flexibility to deal with unexpected events.

Early retirement is not for everyone. You may be better off finding a fulfilling career that you enjoy, or working part-time or seasonally, rather than quitting work altogether.

Investment Properties

Investment properties are another popular way to generate passive income and build wealth. However, investment properties are not as easy or as passive as they seem. They also involve some challenges, such as:

• High Entry Costs. Buying an investment property requires a lot of money upfront. You have to pay for the down payment, closing costs, renovations, and maintenance. You also have to learn how to find, rent, and manage properties. These costs can eat into your returns and make it harder to break even.
• Tenant Issues. Dealing with tenants can be a hassle and a headache. You have to find good tenants, collect rent, handle repairs, and deal with evictions. You may encounter tenants who don’t pay, damage your property, or cause trouble with neighbors. You may also face legal issues or disputes with tenants.
• Hard to Find a Good Property Manager. If you don’t want to deal with tenants yourself, you can hire a property manager to do it for you. However, finding a good property manager can be difficult and expensive. A bad property manager can cost you money, time, and peace of mind.
• Concentration Risk. Owning investment properties also exposes you to concentration risk. You are putting a lot of your money in one or a few markets. If those markets decline or experience problems, your portfolio will suffer. You are not diversified across different types of assets or locations.

Investment properties are not for everyone. You may be better off investing in a diversified portfolio of stocks and bonds, or in a real estate investment trust (REIT), which gives you exposure to real estate without the hassle of owning and managing properties.

Rebalancing Your Portfolio

Rebalancing your portfolio is the process of adjusting your asset allocation to match your target allocation. For example, if you have a 60/40 portfolio of stocks and bonds, and stocks grow faster than bonds, you may end up with a 70/30 portfolio. Rebalancing would involve selling some stocks and buying some bonds to bring it back to 60/40.

Rebalancing is often recommended as a way to reduce risk and enhance returns. However, rebalancing is not as important or as beneficial as you may think. Here are some reasons why:

• Rebalancing Reduces Your Exposure to Your Fastest Growing Assets. Rebalancing means you are selling your winners and buying your losers. This can lower your returns, especially if your winners keep winning and your losers keep losing. For example, if stocks outperform bonds over the long term, rebalancing will reduce your exposure to stocks and increase your exposure to bonds, which will drag down your performance.
• Rebalancing Has Tax Consequences. Rebalancing involves selling assets that have appreciated in value, which can trigger capital gains taxes. This can reduce your after-tax returns and complicate your tax situation. You can avoid this by rebalancing in tax-advantaged accounts, such as IRAs or 401(k)s, or by using new contributions to buy more of the underweight assets, rather than selling the overweight assets.
• Rebalancing Frequency Matters Less Than You Think. Rebalancing too often or too infrequently can have negative effects on your portfolio. Rebalancing too often can increase your costs, taxes, and stress. Rebalancing too infrequently can increase your risk and deviation from your target allocation. However, the optimal rebalancing frequency is hard to determine and depends on many factors, such as your asset classes, your risk tolerance, and market conditions. A good rule of thumb is to rebalance anywhere from once every six months to once every three years, or whenever your allocation drifts by more than 5% from your target.

Rebalancing is not a magic bullet. It can help you maintain your desired risk level and capture some benefits from market fluctuations, but it can also lower your returns, increase your taxes, and add complexity to your portfolio. You should rebalance periodically, but not obsessively.

What’s Not Overrated?

While there are many overrated things in personal finance, there are also some underrated things that can make a big difference in your financial success. Here are some of them:

• Knowing History. Learning from history can help you understand how markets work, how investors behave, and how to deal with uncertainty and volatility. History can provide you with valuable lessons, insights, and perspectives that can improve your financial decisions and outcomes.
• Diversification. Diversifying your portfolio across different asset classes, sectors, regions, and strategies can help you reduce your risk, smooth your returns, and increase your chances of reaching your goals. Diversification can also help you avoid putting all your eggs in one basket, which can be disastrous if that basket breaks.
• Raising Your Income. Increasing your income is one of the best ways to boost your savings rate, build your wealth, and achieve your financial goals. Income is the fuel that drives your financial engine. The more you earn, the more you can save, invest, and spend on the things that matter to you.

Personal finance is not a one-size-fits-all endeavor. What works for one person may not work for another. You have to find what works for you, based on your goals, preferences, and circumstances. However, by avoiding the overrated things and focusing on the underrated things, you can improve your financial situation and live a better life.