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Personal finance has issues. This is because there are many things that are true on average that will not always prove true in the short run. Here are some examples:
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- Those that save more and spend less for personal needs will usually do better in the long run than those that spend a higher proportion of their income.
- Those that take moderate risks in investing tend to beat both those that take low risks, and those that take high risks. But over short periods of time, who can tell?
- Over the long run “buy and hold” tends to work. In the short run, who can tell?
- Good investing is boring. It is not entertaining. An average person looking at the portfolio that I own for my clients would only recognize 10 of the 36 companies that I hold. The best stocks are those of neglected companies that do their boring business and make money quietly.
- In general, it is wise to have as little debt as possible. When you do have debt, pay it off rapidly, or make sure that the debt is non-recourse (the asset purchased collateralizes the loan in full.
- In general, it is honorable to pay your debts in full. Occasionally, some life event happens that makes it impossible. That is what the bankruptcy code is for. When bad providence is overwhelming, take the hit, declare bankruptcy, and battle back from there. In the Bible, debt-slavery was limited to seven years — why should the loan sharks get more of your life than that?
- Financial education, as well as education in general, is no panacea. As one of my brighter friends at RealMoney, Howard Simons, used to say (something like), “On Wall Street, to those that are expert, we give them super-advanced tools that they can use to destroy themselves.” There is almost never a level playing field in investing, unless you do all of the work yourself.
- Risk control is the key to investing, and women do better at that than most men. I liken it to chefs. Most of the best chefs are men, but women beat men on average in cooking. (An aside: cooking is my hobby. My wife likes my cooking.)
- There is no way to get rich quick. Ignore seminars that tell you that it is possible, like “Rich Dad.”
- Peter Lynch popularized “buy what you know,” but he was far brighter than that and a real detail person. Many people moved to residential real estate post-2002, but did not realize that if prices get high relative to rents, that prices can fall. They bought what they thought they knew, and lost.
- After the market declines of 2000-2003 and 2008-2009, many people swore off the stock market at the wrong time. The uneducated buy and sell in response to fear and greed. Buy and hold is better than that, always, and that is one reason to employ a professional that does not get shaken by market moves, good or bad. (It took 5-10 years to develop ice-water in my veins.)
- It is always good to be skeptical of those that talk to you about finance, even me. Particularly be skeptical of those that will buy you a nice meal with the aim of getting your business. There are many strategies to get you to say “yes.” If you dare, read marketing books, they will help you develop sales resistance.
- Defined benefit pension plans are better for workers than defined contribution plans like the 401(k), but they cost a lot, lot, lot more. That’s why they don’t exist today.
- Most people, if left to themselves, will not plan for the future. That is why there are commissioned salesmen (brokers/insurance) to sell them products inferior to what they would get if they planned for themselves.
That took more words than I expected. Before I go on, I want to say that I liked that book a lot with some reservations.
Let me now go to the book, and tell you what I liked and what I did not.
What I Liked
- The book is honest, it flags all of the problems in personal finance. Some of those problems are unavoidable, because returns in the market are lumpy, as opposed to the smooth projections of the financial planner.
- It explains why defined benefit plans are better for average people, because they are not investors, they are budgeters at best, and need to receive a steady income in retirement.
- She explains the ways that salesmen try to make you buy what you shouldn’t.
- She understands that most investment advice is shallow, and wrong.
- Expense and debt control aren’t everything. That said, they are good things.
- She recognized that women are better risk managers than men. (Men are too certain of themselves; I have rules for myself that tie my hands so that I do not act on fear or greed.)
- She gets that real estate is an expense, and not an investment.
- Financial celebrities are often wrong.
- She understands that the financial industry has many tendrils into academia & politics, to spread a message favorable to itself.
What I Did Not Like
- It may be that most people in financial trouble have had notable accidents happen to them, but that does not invalidate the idea that being careful with your spending and sparing on debt are wise ideas. Aside from that, people need to insure themselves properly, and be prepared for layoffs — have transferable skills that can work in multiple industries; be a continual learner. Also, be aware of the finances of your company. If you think it is in trouble, look for work before you are laid off.
- She doesn’t get how expensive it would be to create defined benefit plans in place of defined contribution plans. The costs are what led corporations to terminate the plans.
- She doesn’t get that there are many people who will not take prudent actions for the future. That is what commissioned salesmen are for. They get the imprudent to do something good for them selves that they would not ordinarily do.
- Talking about money is not enough. With most people it is a mere sharing of ignorance, and not much better than what you get from other sources. You *can* get educated about money, but it takes time, effort, and diligence. Who is willing to do that?
She is long on critique, and short on real ideas to improve the situation. The critique will help you know what to avoid. But when you are done with this book, you will have no positive plan for what you should do. If you want to, you can buy it here: Pound Foolish: Exposing the Dark Side of the Personal Finance Industry.
Full disclosure: I borrowed the book from my local library.
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By David Merkel, CFA of alephblog