Money Obedience

Any list of 4, 7, 10, or more things is popular among writers – not just among journalists, but also among bloggers. But lists themselves don’t do that much. (1)They are most likely incomplete. (2)They may be deeply flawed. (3)They may be outright wrong. (Now, for a self-effacing question, “How many of the three problems in my lists apply to this list itself?”)

Two days ago MSNBC published an article entitled “Seven lessons from the financial meltdown.” Among these seven lessons, there were two that are really not lessons, and if they are lessons I say they are teaching us the wrong thing.

First they said that this is wrong: “A house is a great way to save money for the long term.” Nope, they’re wrong. This idea has held true for generations before this one and it will hold true for generations to come, no matter that this article wants to convince us otherwise. The underlying problem is that we have grown to view a house as a financial asset rather than a home. Those previous-generation parents who were lucky enough to buy property bought a house and made it into a home. They paid off the mortgage over time and owned it outright in retirement. The house had indeed grown into a major asset by the usual means – they accumulated their wealth one mortgage payment at a time. There were no refinancings, there were no second mortgages, there were no cash-out mortgages; there were only plain vanilla mortgages that were paid off dutifully month after month. That is how previous generations accumulated wealth with their houses. We just stopped doing that. But that does not mean that a house is not a great investment for most families anymore. We just have to go back to basics.

MSNBC also tried also to convince me that this one is false: “Asset allocation is a good defense against losses.” – This, too, has held true for generations and will also hold true in the future. Sure, the best asset allocation cannot ensure that you never have to look at any losses when you invest in risky assets, but that is not the point of asset allocation. The point is that asset allocation allows you to accumulate wealth over time in a way that fits your personal risk attitudes and that balances all financial risks against each other. There will always be up and downs with risky assets. But that does not mean that asset allocation is a silly and useless exercise. As a matter of fact, as soon as you own any assets, you have made a decision to allocate them, even if you decide to put all your assets into a savings account. If your assets are somewhere, you’ve allocated them! If they’re in a savings account, you may not face big losses like many of us faced during the decline of the stock market, but instead, you will face a steady and relentless erosion of your spending power that will make you relatively poor over time because savings interest surely never keeps up with inflation. Therefore, no matter what you decide, you are contending with economic risk. So, you should think hard about asset allocation if you want to hold onto your hard earned money.

As far as I am concerned, there is only one lesson that we can take away from the financial crisis and it’s this lesson I’m standing by: “Time honored financial principles work no matter what the circumstances.” There is no get-rich-quick scheme. There is only sound financial planning and financial management that keeps you financially safe in the long run. Oh yes, that also implies another lesson, so sorry, I have to add one more. It’s: “Don’t believe the hype,” like the hype fuelled by media companies like MSNBC, CNBC, and others during the housing bubble.

I recently wrote about a financial planning seminar that I had attended a little while ago. I mentioned one couple who were happy customers of the financial planner who invited us to dinner. They were particularly happy with him because he put them into some great investments.

The best one of these investments was – all after-tax income! The wife proclaimed, “We did not even have to pay a commission to get into this.” That is how terrific this financial planner is. He finds safe investments with this kind of return – without incurring any risk or cost.

There are some good tips on various websites that help you chose a good financial planner. I do not see a need to repeat these tips here. I’ll simply ask you to just check out some of the sites about financial planners at the bottom of this page. Using their tips should bring you some peace of mind when it’s time to settle on a financial planner to advise you on how to manage your hard-earned money.

http://www.cfp.net/learn/knowledgebase.asp?id=6
http://www.planforyourhealth.com/about/finplanner/
http://www.thestreet.com/story/10412811/1/how-to-choose-a-financial-planner.html
http://www.wisebread.com/how-to-choose-a-financial-planner-yes-you

A little while ago I got an invitation to go to a personal finance seminar free of charge, and dinner was served! The event took place at a very nice setting - a local private country club. After wondering for a little while why I got an invitation, I called up and made reservations. I was too curious to see what a financial planner from one of the largest financial planning firms in the US would tell his guests.

The financial planner greeted everybody at the door. He was a nice looking, older gentleman who later on informed his guests that he got into financial planning after he had helped out a relative who needed to sort out a long-term care plan. He appeared to be a nice man. I am convinced that if you hang out with him in private you’d also find him to be a nice man. He definitely left a good impression with me.

Let me also tell you about the people I met there. I sat at a table with two couples. The more affluent looking couple was actively looking for a financial planner who would help them sort out their finances, especially looking for advice on what to do with their retirement savings. The wife was not ashamed to say that she had no idea about any of this “finance stuff.” The husband must have made some money in his life, but in conversations it became clear that he was not that well versed in personal finance topics, either. I guess that is why they were looking for some help. To me it makes sense to scout out different financial planners. The couple can decide later whom they trust and with whom they feel most comfortable.

The other couple was actually a customer of the financial planner who had invited us all to this dinner presentation. Both the husband and the wife were talking about their finances telling us about the great investments they had. They had gotten some of these investments from this one financial planner of whom they said that he was “just great.”

I suspect there are at least three reasons that this couple who were already his clients might have been asked to come to this dinner. First, perhaps the financial planner wanted to fill up the space. Maybe he had to pay a minimum fee to the country club for hosting such a dinner, regardless of the number of people, and he didn’t want his hard-earned money to go to waste. Perhaps, second, the financial planner wanted the others at the table to know he comes highly recommended. One cannot do much better than getting a recommendation from real people. It is one thing if he tells us how great he is, it is yet another thing if somebody else (who has worked with him) tells us how great he is and how he helped others. Third, in this way he is paying them back for the commissions he got from them trying to stay on their good sides. Who knows how much more in commission income he can generate from them? They have already decided to retain him for his services, so it is a lot easier for the financial planner to talk them into other financial products than it is to recruit brand new customers.

And then, also at the table, there was I. I was just trying to make sense of this whole thing. I picked one of four dinner events to which the financial planner had invited me. There were about 30 people at the dinner. I suspect the other events had to be as well attended. This financial planner is willing to stage such events to get more customers. So, the few who signed up with him have got to make up for the expense of all the others who did not sign up. In other words, this financial planner’s customers have got to pay him enough in fees and commissions to make these events a success for the planner. The financial planner is probably most concerned about making back the money he spent on dinner. This is what I know for sure.

Where does this leave the customer? Who knows? This really depends on whether the financial planner is driven by his customers’ success or his own. Perhaps both drive him. The latter would not necessarily be bad, since he’s got to make a living, too. The only question remains how much of his attention is spent on getting the money back he used for dinner and how much of his attention is spent on doing the right thing by his customers? And this is a question only a financial planner can answer for him- or herself.

When I read personal finance blogs or articles about personal finance I sometimes think that all of it sounds so easy. Most writers have some pretty good pieces of advice. Some even share their personal experiences and challenges with their own personal finance. The audience gets to read about their struggles and successes. It all sounds very real and probably is very real. At the same time, it is hard for anybody to follow the blueprint that has worked for somebody else.

Why is that? Well, there are really only two things that matter in personal finance – “personal” and “finance.” Many books have been written about the finance part. Many theories have been developed around it. Many good rules have been established. Some of these books, theories, and rules also refer to the “personal” part of “personal finance”, but they don’t really refer to it in a more narrow sense. After all, there is nothing “personal” about a general rule or theory, is there?

I came to the conclusion that the “personal” part of “personal finance” is what matters just as much as “finance” if not more. Unfortunately it is this personal part that is often neglected. We are all individuals with our own likes and dislikes, with our own abilities and shortcomings, with our own reasoning and feelings. We all may know that we have to apply some rules, but we certainly go about applying these rules differently. What works for one person may not work for another. What may be a good strategy for one person may be a terrible strategy for another. We as individuals have to figure out what works for each one of us.

This is really no different than any other challenge in life, right? The experience of life is a deeply personal and individual experience. That goes for our roles as children, parents, siblings, friends, and yes, also for our role as our own chief financial officer.