The Rare Personal Financial Advice That Is Actually Useful!
Like most practical things in life, personal financial management tends not to be something taught, but something learnt. This is unlike subjects like science and mathematics, where there is a clear, teachable theory. Personal financial management does not to have much in way of theory behind it, and for most part we “learn by doing”, or “learn by watching”. True, we can also learn personal financial management by reading. But even with countless books written on this, how many are truly useful or relevant? For example, books from the US, are for most part more concerned about managing taxes, optimising Social Security and Medicare, and dealing with student loans, none of which are useful or relevant outside of the US. But once in a while, we find a book on personal financial management that has advice that is actually useful!
Long time CBS News Business Analyst Jill Schlesiger has written a book that is easily readable, but more importantly, contain 13 points of advice, some of which do make a lot of sense when looking back across a lifetime of personal financial planning. Of course, not every single one of the points raised is useful or relevant. But here are the 4 which come across as being personal financial advice that is actually useful!
Hard truths about personal financial management which are actually useful
- You Buy Financial Products That You Don’t Actually Understand
- You Take Financial Advice from the Wrong People
- You Make Money More Important Than It Is
- You Buy The Wrong Kinds of Insurance, or None at All
If you are really curious about the other 9 points of advice, you can jump right to the end. In the meantime, rather than reproducing Jill’s thoughts on these 4 points, we thought it’d be better to put our reflections on them and what they mean in the overall scheme of things.
1. You Buy Financial Products That You Don’t Actually Understand
Personal financial management advice really becomes useful at the point in life when we are past the initial years of trying to save a little, and building a small pile of money of investments. What does financial theory tell us at this point? Well, the basics which everyone knows. That is, diversify investments amongst stocks to capture the equity risk premium, invest for the long term and do not time the market, adjust the risk of investments by holding more risk-free deposits or by leverage. But more often than not, we do not follow the advice that financial theory behind it. Not only that, we promptly throw money away by “investing” in all sort of weird and wonderful products. For example, Investment Linked Policies, Equity Linked Notes, Foreign Currency Options, Commodities and Cryptocurrencies, to name a few.
Why do we do this? Perhaps it has something to do with the financial and investment advice we receive at this stage of our journey. Perhaps it is the liberating feeling that now that we have a bit of money, we can try our end at different things to stand out from the crowd. Or maybe even to outperform it. After all, all the stories of successful investors and entrepreneurs start with them being somehow different from the rest of the crowd. But what is true, is the human psychology is such that the choices we have tempt us too easily.
This ends up with the investor investing in more and more complex products, which do not always have better outcomes. And which, without fail, leave the investor’s heart pounding with fear when the market prices for the investments drop precipitously, as they will every now and again. And note that almost every piece of financial and investment advice received in this manner will almost certainly go against everything that finance and investment theory tells us. Which also shows how few people actually believe in theory and historical evidence, and how much more likely they are to tell themselves that either “this time is different” or that “they are the chosen one”.
2. You Take Financial Advice from the Wrong People
Why do we invest in products we do not really understand? Simply because a very large industry has sprung up around selling complex products to investors, all to earn more fees from them. No sooner have we reached a certain level of assets in our bank accounts does a “wealth advisor” or a “wealth manager” start calling and introducing themselves. Reassuringly telling you that they will be personally overseeing your account and they will be contactable at all times. What an effective way to stroke the ego of a new investor! At higher levels of assets, perhaps a “private banker” might come calling too! But these advisors and bankers have to earn their keep as well. And they do it by selling you investments which are more complex than the run-of-the-mill diversified stock portfolios, all the better to:
- Convince you that you have the makings of a successful investor and can only reach your potential by taking on more and more complex risks and products that other not as successful as you would not touch
- And of course to earn more fees buried deep inside the complex structures of the investments offered
And of course there will follow on “advice” to switch between different investment products as the opportunities arise. All the better to “time the market” and “take advantage of the market opportunities”.
But the motivations of the people advising us on personal financial management and investment matters is only one part of the story. The other part is because it is difficult, if not impossible, to get the advice we need. Just as an aspiring CEO of a startup would like an experienced CEO as a mentor, but can only get management consultants who have never run a business to advise them, in the same way, a millionaire may wish to have another more experienced millionaire to provide advice, but all that is available is a young wealth manager who is not even at the same level of wealth! People who have gone through the same stages of their financial journeys (and survived all the painful lessons) generally do not have the time, nor inclination, to do the same for those who follow.
But it also a trait of people that they are too stubborn to learn from the experiences of others who have come before them. Even if such learnings are in theory and other books. So we have ourselves to blame as well for taking advice from the wrong people. After all:
The fault, dear Brutus, is not in our stars, but in ourselves.– Julius Caesar
3. You Make Money More Important Than It Is
If you are finding yourself in the trap where you are buying financial products you don’t really understand, and taking financial advice from the wrong people, chances are, you are taking your money a little too seriously. Sure, it pays to be serious about your money, as nobody will care as much for it as you will. But there is a fine line between caring for it, and doing simple but intelligent things with it, like investing within the realms of reason and sticking with it for the long haul, and obsessing about money, and then looking for the latest “get rich quick” scheme.
At some point, perhaps early on our personal financial journey, we may have enough in assets and investments that we start to feel wiser, more worldly and more sophisticated than we actually are, and that is when we start falling for advice from self-motivated people persuading us to invest in things we don’t really understand or believe in. And this may not end badly, yet. Success in these early forays into complex investing with higher fees may then lead us to take ourselves and our money too seriously, obsessing over every last percentage point in returns, irregardless of the risks taken. We think about alternative investments, private equity, Bitcoin, commodities, leverage, and a whole host of other things which have the potential to multiply our money. All it takes at this point, is one bad financial decision for it to unravel.
At the end of the day, it is important to see money for what it is. An enabler for a better lifestyle. Better lifestyle does not necessarily mean more lavish or more luxurious, but instead may mean more time, better relationships, pursuit of interests, rather than just having more money. It is not surprising that many people who may already be financially independent, even richly so, still cannot tear themselves away from their day-to-day grind. This is the “One More Year” syndrome. Or continue to funnel funds into high risk investments in the dream of catching up with the deca-millionaire, or centi-millionaire. It never ends if we go down this path of taking money too seriously. After all, whatever happened to:
4. You Buy The Wrong Kinds of Insurance, or None at All
Insurance is probably the most confusing area of personal financial management, and for good reasons. Hence, personal financial advice regarding insurance that is actually useful is quite hard to come by. You see, unlike savings, investments, and planning for retirement, there is hardly any theoretical or empirical work on why, when, and how much insurance we need to get. Or at least that is easily understood and available to the layman. How insurance is provided and priced is a clear science, that is, actuarial science. But the consumer demand for insurance and behaviour around it is hardly well understood by most, least of all the Insurance Agent or financial advisor trying to sell you a policy!
And what little we do know about the correct way to insure ourselves is often ignored by salespeople and the people buying insurance themselves. For example:
- The main risks we need to insure ourselves against are as follows. Living too short, falling sick, getting injured, and living too long. Too often, we underinsure ourselves for living too short initially, then overinsured later, overinsure ourselves for falling sick initially, then underinsure later, and fail to insure against living too long altogether
- Protecting against longevity and inflation is a must in an era of longer lifespans thanks to (costly) medical science. And yet deferred annuities indexed for growth/inflation are amongst the least popular choices of annuities
- We are better able to bear the small loses due to the deductibles and copayments than the huge medical and hospital bills we may get from time to time. And yet expensive riders which cover the first dollar of medical and hospital costs are still popular amongst buyers
And the list goes on! Since insurance is usually sold and not bought, there is even more reason to suspect that the advice we get for insurance purchases is coming from the wrong people. Even more so than advice for investments!
In reality, personal financial management advice that is actually useful is not that hard to come by. But it is hard to accept something as stodgy as investing in a diversified portfolio of risky assets for the long run is the best advice. This lacks the glamour of making a killing in the markets, being on the technological cutting edge, or being the next Warren Buffett. And it is also the reason why we keep making the same mistakes over and over again.
And in case you are wondering, here are all the 13 dumb things that smart people do with their money:
- You buy financial products that you don’t understand
- You take financial advice from the wrong people
- You make money more important than it is
- You take on too much college debt
- You buy a house when you should rent
- You take on too much risk
- You fail to protect your identity
- You indulge yourself too much during your early retirement years
- You saddle your kids with your own money issues
- You don’t plan for the care of your ageing parents
- You buy the wrong kinds of insurance, or none at all
- You don’t have a will
- You try to “Time” the market
There, you have it! Personal financial management advice that is actually useful!