Lies, Damn Lies, and Personal Finance

A co-worker recently sent me an article written by Helaine Olen entitled, The End of Personal Finance–Decades of advice turn out to be so much garbage. Published on Slate’s The Big Money site, the article received kudos from an unlikely source, BoingBoing.net, in a guest post written by Douglas Rushkoff, author of Life, Inc. due out in June 2009.

The article begins with Olen recounting how, in 1997, a financial adviser she was working with to write a financial makeover feature dismissed the notion that gold was a good investment. Gold was trading at $300 an ounce and now trades at around $900. As a result, she views her decision to leave gold off the table as a mistake. (It wasn’t, but we’ll come back to that in a moment.)

Olen than proceeds to argue that personal finance is, or at least should be, dead. She attacks stocks and the “efficacy” of the market because it was down 40% last year. She describes the personal finance industry as a “self-help complex,” and argues that the idea that one can manage their money on their own is a lie because prolonged unemployment can burn through 6-months of emergency savings.

Olen then quotes Nan Mooney, author of Not Keeping Up With Our Parents: The Decline of the Professional Middle Class, as saying that “personal finance has come to substitute for the role government should play for people.” Substitute the word “neighbor” for the word “government” in that sentence, and its absurdity stands out like a fart in church.

And then the article turns really dark:

Which leads to another question: What’s next for personal finance? The past two years have demonstrated over and over again that bad things can happen to good savers and investors. Very few of us have the wherewithal to fund both retirement savings and a large enough emergency fund to sustain us through a bout of unemployment lasting, say, more than a year. No one, it turns out, really knows what an individual stock, mutual fund, or commodity like oil or precious resource like gold will be worth in six months, never mind six years.

Nonetheless, personal finance is unlikely to crawl away and die anytime soon for a simple reason: We think we need it. “We’re kind of screwed but we don’t have a choice but to take care of ourselves because no one else is helping,” admits MSN’s personal finance columnist, Liz Weston.

And then Olen asks for an apology from personal finance gurus (think Orman or Ramsey, but presumably not Liz):

Me, I’d settle for a few mea culpas from our finance gurus. After all, I am aware I owe my gold-loving dude an apology. Unfortunately, I know the planner assigned to the case won’t be eating crow any time soon. I recently received a copy of his latest book in the mail. It’s all about how if you can just identify your money archetype, financial success will be yours. Oh, and one other thing. The press release quotes him as advising, “Don’t rush out to buy gold.”

Here’s a summary of Olen’s article:

Personal finance gurus advised us to eschew consumer debt, save an emergency fund, and invest in a diversified portfolio of low cost mutual funds.
Americans followed this advice.
The advice was obviously wrong because over the last year or so the market is down, real estate is down, and unemployment is up.
Personal finance gurus owe us an apology for the awful advice they gave us.
The government should step in and take care of us, because we are not capable of managing our own affairs.

Olen’s article demands a response:

Gold is a crappy investment

Olen, you don’t owe your “gold-loving dude” an apology. While it’s easy to be swayed by the here and now, particularly when it comes to investing, the price of gold today does not make it a good investment. You’ve chosen to compare the price of gold in 2009 to its price 1997. Why not pick 1980 when it was hovering at over $600, which on inflation adjusted terms exceeds the $900 price tag today. Remember, in hindsight we can pick dates to make any investment look good, even Enron.

And if you don’t believe me, here is what Warren Buffett had to say about gold in 1998:

It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

Will the price of gold enjoy a resurgence when investors are scared away from everything else? Sure. Does that make gold a good, long term investment? Nope.

Personal Finance is not God

In one sense, Olen’s article hits on an important point. We shouldn’t put our faith in money or personal finance. No amount of emergency fund can shield us from financial calamity with absolute certainty. A prolonged bout of unemployment will wreck just about everybody’s finances. Add to that the falling stock market and housing market, and a lot of people are in real financial pain right now.

But just because sound money management is not a guarantee that life will go our way, does that mean it has no value and we should throw it away? If that’s the standard, government would have been gone a long time ago.

Let’s Get Real

Reading the article, one gets the sense that most Americans suffering financially had followed the advice of the personal finance gurus Olen believes should apologize. But surely that’s not true. Do most Americans have a 6-month emergency fund and no consumer debt? How many followed Dave Ramsey’s advice to buy a home only when they have a down payment of 20% or more, and can afford a 15-year fixed-rate mortgage that keeps monthly payments to 25% or less of monthly take-home pay?

There are undoubtedly examples of folks that did follow this advice, and are still suffering financially. But does that describe most of us? All the studies I’ve ever read say the answer is no. Americans are mired in consumer debt, studies show we overspend, and the recent housing bubble (fueled by the government) demonstrates our willingness to pay just about anything for a house in a hot market.

And it’s here that we need to be honest with ourselves. We need to take an honest look at our finances and our money decisions. It may make some feel better to blame others, particularly personal finance gurus, but is that the honest answer to the financial difficulties most of us now face?

Olen writes:

That our personal finances weren’t fully ours to seize didn’t seem to occur to many of us until recently, when the stock market plunged almost 40 percent in a mere year, housing went into free fall, and the unemployment rate began to climb perilously toward double digits.

But what exactly does this mean? If the point is that circumstances outside our control can affect our finances, certainly that’s true. It’s also true that when times are good, people tend to forget that it won’t last forever. The same is true when times are bad.

The Stock Market is Efficacious

Olen clearly views the market as defective because it lost 40% last year. And she writes, “No one, it turns out, really knows what an individual stock, mutual fund, or commodity like oil or precious resource like gold will be worth in six months, never mind six years.”

It’s the subtle phrase, “it turns out,” that makes that sentence. Those three words suggest that until last year, everybody believed they could predict the market six months or six years from now. Really? Who?

Every good investing book I’ve ever read says the exact opposite. We can’t predict the future price of the markets, and we shouldn’t try. That’s not a problem with the market, it’s a reality of life. And by the way, you can’t predict the future price of gold, either.

But what we can predict with reasonably assurance is that over a lifetime of investing, investors will enjoy really good years and really bad years. In that context, last year’s 40% decline should not come as a shock or surprise to buy-and-hold long term investors. Neither should the 35% gain we’ve enjoyed since March. That doesn’t make last year any fun, but it should help us understand that the “problem,” if there really is one, is not the market. If we don’t come to that realization, we shouldn’t have been in the market in the first place.

The Choice is Yours

Each of us has a choice to make. We can throw up our hands in frustration and give up. We can blame Wall Street, the government, or even personal finance gurus if we want. But doing so won’t improve our lives.

Or we can learn from the past year, and day by day make the best personal finance decisions we can. Does this guarantee financial security? Of course not. And personal finance has never promised such a guarantee. But the fact is that we can, by and large, control our financial destiny.

Suze Orman has described the current recession as “the greatest thing that has ever happened to youth. It gave you a wake up call that your parents were living in financial la-la land.” She’s right about that. It’s given us all a wake-up call. And we shouldn’t hit the snooze button.

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