Irksome Adversaries

Jonathan Clements

WE FIGHT ABOUT MONEY all the time. Politicians argue over how to spend the stuff and who should pay. Couples argue about why there isn’t enough and who’s to blame. And nerdy folks—that would include me—bicker over which investments to buy, when to claim Social Security, the virtues of homeownership and countless other topics.

These debates may amuse others, but I often find them frustrating—because they’re never just about facts and logic. Instead, far too many people come to these arguments with baggage that borders on cargo. Below are the four groups of folks you never want to debate. We’re talking here about financial topics, but (dare I mention this?) the same holds true for politics:

1. Those enamored of anecdotal evidence. As experts in behavioral finance often note, we’re much more likely to be won over by a good story than a compelling statistic.

An example: Whenever I question the virtues of cash-value life insurance, I’ll often hear from insurance agents who recount touching tales of delivering fat checks to grieving widows. But this is an intellectual non-sequitur: The fact that these agents have delivered checks to widows doesn’t clinch the case for cash-value life insurance. Term life insurance would also have paid these widows a death benefit—and, in fact, they might have received a much larger check, because they could have afforded more coverage, given term insurance’s far smaller premiums.

Similarly, fans of active management will point to Warren Buffett, who does indeed have a fabulous 56-year record. But so what? The fact that somebody somewhere won the lottery is hardly a compelling argument for buying lottery tickets in general, nor does it mean you should find the lottery winner and ask him or her to buy tickets on your behalf.

To be fair, we all know (I hope) that the lottery involves no skill, whereas Buffett has—I believe—proven that he has astonishing skill. But the point still holds. Over the years, many money managers have appeared skillful. But if you’d taken that as a sign you should invest with these money managers, you usually would have been disappointed, as their hot hand turned cold. Even Buffett’s results have been relatively pedestrian over the past decade, though that’s hardly surprising, given the many billions he now oversees.

2. Those with a financial incentive. Why do financial advisors who sell customized portfolios decry target-date retirement funds? Why do insurance agents insist cash-value life insurance, variable annuities and equity-indexed annuities are great investments? Why do active managers belittle index funds and depict them as somehow evil? Why do so many employees of full-service brokerage firms dismiss everyday investors as stupid—and persist in pushing the deeply flawed Dalbar study?

These aren’t exactly trick questions. We all know why: These folks have a financial incentive to take the positions they do. As Upton Sinclair said, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”

Financial incentives are hugely powerful. Alas, they also infect the financial blogging community. Many bloggers have affiliate marketing relationships with, say, money management firms and credit card companies, which means they make money if readers click through and open an account. This inevitably influences what they write. HumbleDollar used to have some affiliate marketing relationships, but we no longer do. We don’t want readers to worry that we’re running articles so we can make money at their expense.

3. Those who have already cast their vote. Those who own rental properties are often vocal advocates of investing in rental real estate. Those who claimed Social Security early will argue vociferously that all retirees should take benefits at age 62. Those who own individual bonds will often pooh-pooh bond funds.

I think these folks are wrong—and that most people should delay Social Security and stick with bond funds, rather than individual bonds. Meanwhile, I’m leery of rental properties, because it’s a big undiversified bet and potentially a lot of hassle.

But mostly, I’m wary of folks hellbent on justifying what they themselves have already done. Instead, I’d much rather hear from those who have changed their mind, because their new opinion is often the result of anguished self-reflection.

4. Those stuck in the past. As the financial world changes, we need to change with it—but many folks resist tooth and nail. In late June, I discussed four fundamental financial changes that have occurred during the time I’ve been writing about money, including a drastic reduction in the value of the mortgage tax deduction and what appears to be a permanent shift upward in stock market valuations.

Yet many folks simply can’t escape the past. That’s left them sitting on the sidelines as stocks have climbed over the past three decades, while also carrying mortgage debt that’s delivering little or no tax advantage. We need constantly to question our financial beliefs. Some beliefs, like the virtue of holding down investment costs, diversifying broadly and insuring against unbearable financial risks, will endure. But others are less timeless—which means that as the financial world changes, we must, too.

Indeed, we should ask not only whether we’re acting on outmoded financial beliefs, but also whether we’re too influenced by anecdotal evidence or too invested in our earlier financial decisions. It’s bad enough arguing with an adversary who ignores fact and logic. But it’s even worse when that enemy is us.

Follow Jonathan on Twitter @ClementsMoney and on Facebook. His most recent articles include Where We StandGame Over and Pay It Forward.

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