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WHEN I WAS a columnist at The Wall Street Journal, I repeatedly heard two complaints from editors, especially those with little understanding of personal finance: “Our readers want something more sophisticated” and “Where’s the news hook?”
That, in a nutshell, explains why the media can be so bad for our financial health. When print and broadcast journalists cave in to the twin imperatives of timeliness and sophistication, they’re almost guaranteed to lead their audience astray—for three reasons:
1. News is the cattle prod that transforms sound financial strategies into foolishly frenetic activity. I enjoy following the market’s daily drama as much as the next person. But let’s be realistic: It’s about as meaningful as an episode of the Kardashians.
Is there any doubt that we’d all make wiser portfolio decisions if we didn’t know how stocks were performing every second of the trading day, if there was less pontificating about the market’s direction, and if we couldn’t buy and sell investments with just a few computer clicks?
Indeed, I’d argue there’s very little financial news that everyday Americans need pay attention to. I think the new tax law is important, in part because it makes carrying mortgage debt less attractive. I think the new no-minimum policy for Fidelity’s mutual funds is intriguing, because it makes it easier for cash-strapped investors to get started in the financial markets.
What it comes to managing a family’s finances, what else of importance has happened over the past year? Give me a few minutes, and I’m sure something will come to me.
2. Sophistication is an excuse for Wall Street to sell us high-priced garbage we don’t understand. Give my old editors their due: Wealthy folks—like those who read The Wall Street Journal—do indeed believe they ought to own more sophisticated investments, like hedge funds, private equity, real estate partnerships and leveraged loan funds.
Wall Street happily obliges, forever cooking up convoluted investments that are sold by glib salesmen to clueless investors. Almost invariably, these products combine two explosive ingredients: fat fees and leverage. The fat fees enrich Wall Street, while the leverage will impoverish the product’s owners, should anything go awry.
My contention: Whether someone has $50,000 to invest or $50 million, a simple portfolio of market-tracking index funds makes ample sense. Sure, the person with $50 million may need to worry more about taxes and could require a more involved estate plan. But that’s pretty much it.
3. There’s so little of value that we can say about investing—and so much about broader personal finance issues. If you insist on sophistication and on a news hook, you’ll inevitably spend most of your time writing about the financial markets.
Every trading day, the markets give reporters something new to write about. Every year, there’s some new investment strategy that promises endless riches. None of this, however, changes the brutal mathematics of investing: After costs, the vast majority of investors will always end up lagging behind the market averages—and would have fared far better with index funds.
But while investing is a loser’s game, other financial issues are more promising. We can greatly improve our financial lives by buying the right-size home, getting rid of credit card debt, making full use of tax-favored accounts, handling our taxable account with care, purchasing the right insurance, making sure all debt is paid off by retirement, thinking carefully about when to claim Social Security, organizing our estate, raising money-smart kids, being thoughtful in how we spend and—most important—saving diligently.
Occasionally, these topics will offer a news hook, but not often. Some of these strategies involve a degree of sophistication, but most don’t. Yet this is the stuff that truly helps everyday Americans to prosper financially.
Jonathan’s previous articles include No Place Like Home, Not So Predictable, Low Fidelity and Try This at Home. Follow Jonathan on Twitter @ClementsMoney and on Facebook.
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Excellent commentary! I love how you boil the porographically overwhelming “noise” down to its Main Street “signal”.
Interesting observation about wealthy people having a different AA. I have seen charts showing that on average UHNW individuals invest much more heavily in alternatives and have a much smaller allocation to stocks. I just googled this for example:
http://www.kkr.com/global-perspectives/publications/ultra-high-net-worth-investor-coming-age
You have to wonder whether these UHNW investors bought all these alternatives — or were sold them. You can bet good money that it was the latter — but you can also bet that the investors were a receptive audience, because they thought they were getting something special worthy of their wealth.
It is true that Financial Services tends to involve sales, but in you UHNW example you may lose this bet. There is plenty of research and credible evidence to suggest that Private Equity can further diversify UHNW investors and increase risk adjusted return because of the illiquidity premium PE provides. Doesnt Creative Planning (where you serve as a consultant) use Private Equity for certain clients?
I have a more favorable opinion of private equity than, say, hedge funds or real estate partnerships. There could indeed be inefficiencies there to be exploited. But this is still high-risk stuff — and best bought by those who can easily afford the potential losses.
Yeah, I got sold several alternatives (non-traded REIT, BDCs, etc.) based on that supposed “illiquidity premium” 5 years ago.
Returns were better, at first, but gradually dropped to the level of traded equivalents.
Even the broker who sold me the above admitted at our last meeting that any illiquidity premium has now become so little that they aren’t worth pursuing.
Meanwhile the principal value of all the above has declined, substantially.
I’m doing my best right now to get out of them, but from what I’ve read I’ll be lucky to do so without 1/3 or more loss (Jonathan, any recommended secondary markets for them?)
The two ads served to my browser in reading this great article were “99 Retirement Tips You Won’t Hear Elsewhere” and “US Obesity Doctor Reveals the No 1 Worst Carb You’re Eating.” Too funny. Health topics are like personal finance: doing it right is not complicated but it sure is easy to make it so, to baffle and befuddle people along the way.
Jonathan,
You forgot to mention first of all having an emergency fund.
Dave Baese
This is another great article reinforcing the basic truths of investment advice. What I always find comical about so much investment advice is the degree of exactness. “If you cut your exposure to foreign stocks by X% and increase exposure to domestic defense industries by Y% (and pay me to implement this strategy for you) you can expect to have an additional $100,000 by the the time you retire!” I’ve learned that you must never respond to this type of advice by asking “why?” because salespeople always have an answer for “why?” (and for the follow-up questions you will ask). Instead, I recommend asking if they guarantee the additional $100,000. The answer to this question is always “no, but we’ve back-tested this strategy and it works. We tested back to 1950, to 1929, to 1875, to ancient Mesopotamia, and it works!” There is an appropriate follow-up question worth asking: “Given the quality and extensiveness of your back-testing, can you at least tell me that the past performance is indicative of future results?” We all know the answer to this question too.