Analyzing Financial Advice in the Information Age
There is no question: when it comes to access to information, we are living in an amazing time. The internet and broadband revolutions have changed the world forever. With almost all accumulated knowledge available to anyone instantaneously, it has never been easier to access what you need when you need it. This has given rise to blogs, special interest websites, discussion groups, reference pages, and a myriad of other resources with advice for nearly every conceivable scenario. With all this available, you would expect us to be living in a utopian society, free from all worries and comfortable in the knowledge that we are doing everything right. And yet, the evidence is exactly the opposite.
Consider a subject near and dear to our hearts here at Real Life 101: debt. Millions of Americans are currently facing record-high levels of debt burdens leading to foreclosures and bankruptcies at an alarming rate. The most tech-savvy generation (18-34) actually represents the most likely candidates for bankruptcy. Why is the proliferation of information not helping those who are most likely to find it?
If you search on the term “debt” in Google, you will receive approximately 167,000,000 results. If you are more specific, and search for advice on paying off your mortgage, you are likely to come across a puzzling – yet typical – situation when it comes to financial advice. You will come across at least three equally qualified individuals who will offer one of three strategies: 1) never pay off your mortgage – keep refinancing and use the proceeds for other things, 2) pay off your mortgage as agreed over time, but never pay extra, and 3) do everything possible to pay extra money every month, and pay your loan off early. All three will present clear, reasonable-sounding evidence as to why their method is superior. Herein lies the dilemma; who is right?
It is possible to work our way through the maze and arrive at a good solution. Here is some of the advice we give at Real Life 101 when considering financial strategies (i.e.: paying off debts, investing, etc.):
Know thyself – Consider the reasonableness of a plan particularly as it relates to your own behavior. There are many sound financial management strategies that are based on strict discipline when it comes to saving and spending. If you don’t have the self-discipline the plan requires, it’s not a strategy which is likely to work for you. Personal behavior is certainly something which can be changed over time, but be honest with yourself about what is doable. If you regularly run out of money before the end of the month, it’s unlikely you will be successful with a strategy which requires you to save half your annual income.
Check out the other side – Nothing is greeted with universal acclaim; everything has its detractors. Seek out any criticisms of a particular strategy, and see if any of those resonate with you. You may discover that one side wasn’t sharing all the pertinent information or learn about other complications which might prevent you from being successful with a particular strategy. Plus, a critical vantage point may lead to you ask other questions before making a commitment.
Consider ulterior motives – Sometimes, we have to pull back the curtain to see if there is more at stake than simple advice. Does the person or company benefit from you acting upon their advice in some way? Perhaps they want you to purchase a series of books or videos. Perhaps they want you to deposit money in their bank or manage your retirement plan. Whatever the case, it’s worth trying to determine any potential hidden “costs” of following their lead.
Does it make sense? – Even the most sophisticated ideas in this world can be reduced to a basic level and understood if only in broad terms. I’m not a physicist, but I “get” the idea behind Einstein’s theory of relativity. If you’re not an investment banker or lending specialist, you should still be able to understand the basic principles behind whatever strategies are being presented to you. Don’t ever buy in to anything which is “too complicated for you to understand.”
Look Out for Muddy Waters – I’m not talking about the legendary blues guitarist. I’m referring to the decision-making process itself. Whenever we make a purchase, or other major decision, there are a number of factors which come into play: financial considerations, emotional considerations, etc.. It is always best to make financial decisions based on financial reasons. It would seem unreasonable to most people to make an emotional purchase based on purely financial reasons; I can’t imagine my wife being too understanding if I buy her a Christmas card on our anniversary because it was on the clearance rack. However, people routinely use emotional criteria to make critical financial decisions. The effect our purchases have on the way we feel does not last nearly as long as the effect they have on our finances.
Develop Context – If someone offered you an investment with an expected return of 4%, would it be a good investment or a bad investment? It depends upon the context. If the investment was a treasury security, it might be a solid investment. If it was a growth-oriented mutual fund, it would be a lousy investment. Classes like the ones offered at Real Life 101, which present the basic principles of finance, are a great way to foster an understanding of how the various pieces fit together.
We often talk about needing to “have all the information” before we can make an informed decision. But the need to know what to do with that information once we have it is often overlooked. Put another way, the value of information may be fleeting, but knowledge lasts a lifetime.