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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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DrLefty
DrLefty
11 months ago

Great article. A lot of wisdom in all of those points. My husband is a lawyer and has been working on a big case for months. He has a good argument and has written a persuasive brief, but his clients are going to lose. Why? Because…well, Upton Sinclair, take it away.

Langston Holland
Langston Holland
11 months ago

…I’d much rather hear from those who have changed their mind, because their new opinion is often the result of anguished self-reflection.

I’ve yet to meet an indexer who isn’t a converted stock picker, including myself. 🙂

Roboticus Aquarius
Roboticus Aquarius
11 months ago

Here’s another! I started with index funds; but that’s what was in the 401k plan, and my dad had long preached the virtues of such plans. I’ve never purchased an individual stock except in my company’s ESOP.

I would guess your observation is probably more commonly true among older investors; many of whom I’ve heard relate their stock-picking days, and how they’ll never go back. I suspect the younger cohort often get their start in investing with a 401K full of passive index fund options these days.

SanLouisKid
SanLouisKid
11 months ago

When I read a financial article (except for yours), I think of this old phrase: Whose bread I eat, his song I sing. There is apparently a gathering of people who blog about credit cards (and some make a living doing this) called https://cardconexpo.com/. I’m sure the Card Con part of the name is not truly indicative.

IAD
IAD
11 months ago
Reply to  SanLouisKid

I’ll do you one better! There are many people that blog about travel, but there is a small subset of travel bloggers that make an incredible amount of money hawking credit card for points/airline miles (boarding area.com). The Points Guy is another that has literally made millions getting referral fees for credit cards. Such a racket and I’m continually amazed how this new card “is now the one to get” and to just click the link below. Just pathetic!

IAD
IAD
11 months ago

My father believed in rental real estate in which I never paid much attention. Since his passing, my mother and my siblings have been trying to untangle and sell these properties. I know there has been little appreciation over the years, I can attest that being a landlord is a huge pain, and I have to wonder why the average person would ever think this is a good idea. Our plan is not so much to make a profit in the sale of the land and buildings, but to off load them and be done with it. With local and state governments getting involved with renters since COVID, some renters feel there is no incentive to pay rent. I’m sure there is money to be made in rental properties, but for the small investor it feels like more work and suffering than necessary.

medhat
medhat
11 months ago
Reply to  IAD

I’ve personally have been thankful for having avoided this trap, but have friends that strive to be real estate moguls. In my observation it’s a lot about “agency”, having (or feeling) some tangible physical control over an asset, in this case a dwelling place. But when I look at it, I only see the warts, which may not be entirely accurate as well.

medhat
medhat
11 months ago

Here’s to the “nerdy folks”, including me (and probably many/most of your readers)! I’d add a contemporary non-financial topic to your list: don’t try and talk science and data regarding COVID-19 with anyone personally invested on having a position that directly benefits them. I don’t find it aggravating, just incredibly disappointing.

Roboticus Aquarius
Roboticus Aquarius
11 months ago
Reply to  medhat

True. The thing about Covid-19 is it denies surface evaluations as well, as such observations may be both true and false depending on the context. (…and I don’t consider myself all that knowledgeable regarding the virus.)

Einstein
Einstein
11 months ago

Jonathan,
You are certainly ready for the debate but they may want to put a mute button on your mike.

backto185
backto185
11 months ago

Wonderful article about staying balanced, remaining flexible, and continually learning. The article and comments make real estate management look really painful. Glad to have indexed retirement funds and social security as a foundation requiring little to no management.

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