Monday, September 01, 2014

PS - About money, the experts don't know either

kw: book reviews, nonfiction, finance, justified paranoia

Time was (80 years ago), commission-free financial advisers were subjected by Federal law to the fiduciary standard: they were required to act in the best interests of their clients. Others, such as securities brokers, were not. There may be advisers today who are still subject to the fiduciary standard, but I haven't learned of a way to find any. Neither has Helaine Olen, author of Pound Foolish: Exposing the Dark Side of the Personal Finance Industry. The book is a must-read if you have the slightest interest in actually retiring some day.

At present, 43% of American families live paycheck-to-paycheck (p. 228, with a reference to an article on careerbuilder.com). Unless they can greatly improve their income-vs-expense situation, retirement is pretty much impossible. Some could actually afford to save and invest, and I'll get to that in a moment. But most have to think about every purchase. They aren't wasting $5 a day on latt√© or espresso. They have to decide between healthier foods or cheaper, fattier processed foods; they have to scrimp for weeks so a kid can have a $10 gift to take to a birthday party. In the present (post-2007) economy, peoples' incomes are at an all time low.

There are some who could do better with better buying choices. I had the great good fortune to marry a thrifty woman. A friend of mine did not. When we were both in our mid 30's, we owned houses of similar value, and had similar mortgages. Their family income was a little more than ours. But where my wife and I each drove a car that had cost $1,000 or less (this was the 1980s), the other couple one day bought a big minivan for which they began paying more than $200/month (in today's dollars, nearly $500). They'd traded in a car of similar vintage to one of ours. Soon the wife complained to my wife that they were having a hard time paying both the mortgage and the car payment. My wife said, "It was your choice." You can imagine that put a bit of a strain on the relationship. But the picture was clear. Before the van, they could afford to save a little. They could afford the occasional maintenance on the older car. Now they stood a very real chance of losing both van and house.

What can we learn from reading Pound Foolish? Firstly, that nobody, but nobody with the title "financial advisor" is required to act in your best interest. There are some who do so, but they are rare. Secondly, that the best book about the subject is Personal Finance for Dummies by Eric Tyson, a book Ms Olen adores. I've sent for a copy of my own.

Do you have a favorite financial guru? Maybe one of the TV personalities such as Suze Orman or Dave Ramsey? Read this book, and prepare to have your ox gored. I think we can make a rule of thumb here, that the louder the voice, the more foolish the advice. Their stock in trade is not to explain how the national economic situation is affecting you and how to do as well as you can in spite of it. Rather, they blame you for your own problems. Where that might be justified, maybe you deserve a little blame. But in the main, many folks at a "financial seminar" are like the guy who was hit by a driver that ran the light, and gets scolded for stepping off the curb.

I do not use a financial adviser, though I've visited quite a few. I decided I'd prefer to have only myself to blame for investing mistakes. I had thought I was in the minority. Not so. About 65% of men who have money to invest go it alone, and nearly 55% of women. We may not make the best decisions, but we're not paying someone else a percent or two of our net worth to make equally bad decisions! Because the dirty secret of the financial advising industry is, Nobody Really Knows.

So, as you might guess, there is no segment of the industry the book ignores. All thrive, not on good advice, but on good marketing. Mr. Rich Dad, Poor Dad himself, Robert Kiyosaki, comes in for special opprobrium. His lowest cost seminars are mainly hard-sell sessions full of scare tactics to get folks to sign up for "courses" at higher prices. People Ms Olen contacted who'd attended such "courses" found them to be upwards of 70% further marketing for the really special "courses" that cost $12,000 and up, way, way up. It's sad. I really liked his book. Now I find out that "Rich Dad" was a fabrication. Depending on when you ask Kiyosaki, the man is either a composite of several rich men he knows (later in life, not as a child), or a completely imaginary character, or one of several other lame excuses for authoral indiscretion.

Here are the chief takeaways:

  • Every investment is risky. [The "safest" investments have little or no return. The days of the 5% savings bank rate are gone forever.]
  • Life happens. You can't plan for everything. [Bobbie Burns wrote, "The best-laid plans o' mice and men gang aft agley." Much earlier, in The Art of War we read, "No battle plan survives contact with the enemy." Simply put, we plan for what we can anticipate, then there is a car crash, a fire, a divorce, an adverse lawsuit, and you can be wiped out overnight. These days, LifeLock warns that hackers are after our bank and investment accounts.]
  • The great majority of "advisers" really are out to get you, that is, your money. [Try to find one who will waive the yearly "maintenance" fee if your investments go down that year!]
Get this book. Read it. Take your lumps. Get Personal Finance for Dummies and read it. And take this proverb to bed with you until it guides every financial decision: Nothing Good Happens Fast.

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