Why are many smart people clueless about investing/personal finance?

[Brett_Cameron]

Me too. I'm afraid "smart people" are a dime a dozen. Financially smart people are rare in my experience.

You don't have to be smart to save. You don't have to be smart to live a balanced frugal lifestyle. Just disciplined like maybe some invocations of Boglehead type thinking.

You do have to be financially smart to invest successfully in stocks/bonds and achieve above average returns. And if you invest, you don't know that you made smart (or lucky) decisions until well after the fact. So I guess the test of whether you are financially smart in this way is administered by the markets. And you don't really know until near the end of your life if you passed that test.

P.S. I've enjoyed reading all the other theories and experiences in this thread.

There was woman from MS, Oleola James, I think, that gained a little fame a few years ago. She had spent a lifetime washing and ironing laundry for very little money. She had never finished high School, IIRC yet she amassed enough savings that she established a scholarship fund at one of the state universities with her life savings of between $100-$200k.

She wanted to be an inspiration to young, under educated black girls that they can work hard and be successful.

 

[bjorn2bwild]

Before the age of 5, I learned there are only two questions to ask any adult - How old are you?, and how much money do you have?

 

[ChocoKitty]

I often felt that they thought that because they were so smart at medical things that they were smart at everything else.

This reminds me of an article talking about the dangers of being a "sophisticated investor" (i.e., a doctor, executive, or lawyer):

The Hidden Danger of Being a Sophisticated Investor - On Retirement (usnews.com)

 

[Lsbcal]

Before the age of 5, I learned there are only two questions to ask any adult - How old are you?, and how much money do you have?

I'm curious as to the range of answers you got on those bomb shells when you got above age 13.

 

[Katsmeow]

This reminds me of an article talking about the dangers of being a "sophisticated investor" (i.e., a doctor, executive, or lawyer):

The Hidden Danger of Being a Sophisticated Investor - On Retirement (usnews.com)

Great article. And, yes, I have seen this as well.

 

[bjorn2bwild]

I'm curious as to the range of answers you got on those bomb shells when you got above age 13.

I don't remember any of the answers. I just observed from listening, that these were very important questions to ask.

 

[KiraC]

I'm very glad my current brokerage firm offers training on multiple areas of investing. I can now support us through retirement. Until they offered the training though, it was very difficult to find good education.

 

[bjorn2bwild]

Also, I think there is a conceptual divide between spenders and savers -

That is, spenders see money as something that you spend. Savers think in terms of capital - you can only spend what your capital returns.

 

[bUU]

And there are people who see money as a bit of both.

 

[M Paquette]

This reminds me of an article talking about the dangers of being a "sophisticated investor" (i.e., a doctor, executive, or lawyer):

The Hidden Danger of Being a Sophisticated Investor - On Retirement (usnews.com)

"Sophisticated Investor" is one of my most favorite terms! The actual meaning of the term has nothing to do with sophistication. It's usually a synonym for the SEC "accredited investor". http://www.sec.gov/answers/accred.htm

As actually applied in pitches:
A "Sophisticated Investor" is one whose pockets are worth picking; someone with more money than sense; a muppet...

 

[akck]

Add another one to the list, employees of financial services firm. I have worked in a few large and small fin'l serv firms and really shocked to see how many have no clue or interest in their 401k investments. I currently work for a small firm where half of the staff are clueless, one of them is the COO with an MBA!

Having an MBA is no guarantee of getting investing knowledge. I'll bet your COO has an accounting degree and while it gives you an investing knowledge base, it doesn't teach you about investing. As I recall, in my MBA program had one investment accounting course that was about analyzing annual reports and one financial investment course, which was about analyzing stocks. Not everyone took either course, let alone both of them (I did ). While they provided you with the tools, they didn't really teach you how they were used. That came later with on the job experience.

I'd say the best prof was for capital projects class. He was the only one to encourage the class to have an emergency fund and an exit strategy. While it didn't take at first, I saw the wisdom during my first job after graduating. It's come in handy twice now and will once more when I retire.

 

[ChocoKitty]

As actually applied in pitches:
A "Sophisticated Investor" is one whose pockets are worth picking; someone with more money than sense; a muppet...

I agree. When I became a law firm partner, "wealth advisors" started coming out of the woodwork. When other attorneys shared their active trading strategies or stock tips, I just smiled and nodded.

 

[Midpack]

Who is to say that they are clueless and I am not? We are all struggling to tread water in a sea of decisions. We all essentially bet our lives on the validity of our decisions. We don't necessarily know "the end of the story" immediately and what seems smart to us now may turn out to be a huge mistake. We have to base our decisions on what seems sensible to us at the time.

But who's to say that I made the right decisions? Maybe I am the one who is clueless. I knocked myself out trying to learn to invest and then implementing the best plan I could figure out in order to achieve my goals. But maybe the Bogleheads are really not as wise as I think and are "full of canal water". Maybe I would have been a lot smarter to spend my money on doo-dads instead of investing it in index funds. Maybe these funds are the next big bubble, just dying to burst and decimate my savings. Only time will tell.

It is hard not to criticize others for making different choices than mine on personal finance or investing matters. When I hear that a loved one has invested a large amount in gold, or is keeping every cent in the bank at 0% interest, it is like a stab wound in the heart. When I feel like that, I try to remember that I am not the sacred chalice of the One True Way of investing.

In one of the actual cases I am talking about, the individual (58 yo) volunteered to me he 'has nothing saved, and hasn't even thought about retirement yet' - it's not a matter of investment choices/decisions. Another (62 yo) told me he has 'almost nothing saved, his retirement plan is selling the small IT service business he owns.' He has 3 employees and himself, I'd be surprised if the business is worth that much.

It was a question of bright people failing to save & invest, to plan and/or failing to understand their investments or fees paid to begin with - not a question of specific investment choices. FWIW

 

[bUU]

I have three friends who's choice was to invest in their own small business. My friends were drawn into the enterprise by the potential upside and the fact that their limited resources at the time, while enough to start a small business, was not enough to grow into a retirement. To my conservative eye, starting any small business was too much of a risk to take with any amount of money, much less the bulk of what would otherwise have been someone's retirement, but if everyone believed as I did, there wouldn't be any upstarts.

Now, to be fair, two of the three are still in business. They whine incessantly about getting deeper and deeper into debt (even the one who's already 66), but they're still going, so the jury is still out, I suppose, as to whether the investment choice was a good one or not, but none of the three could be accused of not knowing the risk they took going into this, or failing to plan. They just didn't succeed/haven't yet succeeded.

 

[W2R]

In one of the actual cases I am talking about, the individual (58 yo) volunteered to me he 'has nothing saved, and hasn't even thought about retirement yet' - it's not a matter of investment choices/decisions. Another (62 yo) told me he has 'almost nothing saved, his retirement plan is selling the small IT service business he owns.' He has 3 employees and himself, I'd be surprised if the business is worth that much.

It was a question of bright people failing to plan and/or failing to understand their investments or fees paid to begin with - not a question of specific investment choices. FWIW

Maybe I would have been a lot smarter to spend my money on doo-dads instead of investing it in index funds.

Beyond our investment choices, who is to say that even our choice to invest at all is necessarily the wisest thing to do with our money? The future is unknown to us and if we could predict it, we would all be wealthy. But we cannot. While not probable in my opinion, it is possible that Zimbabwe-like inflation or some similarly wild and unexpected occurrence will take all of our money and investments or even our entire economy or civilization down. If that happened, maybe I would wish I had bought what I could, while my money was worth something.

My point is not that this is probable, but that what we do with our money depends on the assumptions that we accept. How can we presume to judge what assumptions others accept, when we cannot know for sure what the future may hold? Until it happened, I never dreamed that a nationwide housing crash was a realistic thing to expect, and I am sure that is not the last surprise that life has in store for me.

We would like to think that saving and investing wisely would bring us better results in the long run, and I assume and believe it will. I have bet my life on my conviction that it will. From what I have seen and learned in life this is my best shot. Still, it's really hard to know for sure since results over the long run are by definition a work in progress. So, we assume.

I should have added the phrases in blue to the sentence below.

It is hard not to criticize others for making different choices than mine on personal finance or investing matters. When I hear that a loved one has invested a large amount in gold, or is keeping every cent in the bank at 0% interest, or is spending every last cent he has or can borrow, as though there was no tomorrow, it is like a stab wound in the heart. When I feel like that, I try to remember that I am not the sacred chalice of the One True Way of investing or handling money.

 

[nun]

Having an MBA is no guarantee of getting investing knowledge.........

.....or any knowledge at all in my experience. Back in 2000 I went to a talk by our MBA qualified COO who declared we had to grow by 14% every year....a few of us made allusions to grains of rice on chess board and geometric progressions.....he wasn't happy.

 

[nun]

I agree. When I became a law firm partner, "wealth advisors" started coming out of the woodwork. When other attorneys shared their active trading strategies or stock tips, I just smiled and nodded.

Some people are dumb when it comes to investing and some are too clever. I have a friend who is a CFA and owns an small insurance brokerage. He does very well and is a big fan of active trading and alternative investments, reads Barrons and likes to time the market. He got onto "portable alpha" the other day. I also smiled and just said that my goal is alpha = 0 and beta = 1 with the certainty of minimizing fees.

 

[bjorn2bwild]

So another common trait seems to be specialization. We are highly competent in our specific field, lame in others.
i.e. - Einstein could calculate the amount of energy needed to slow a 4,000lb vehicle traveling at the speed of light to a complete stop. But would you want him to perform the brake job later?

 

[mickeyd]

I have always equated this lack of incentive by my fellow Americans when it comes to, lets call it personal finance, to their perceived inability to complete their own federal income tax forms.

If you simply read the forms (even doing it via stubby-pencil) and follow the seemingly complex directions you can do your taxes with no assistance. Millions do. With the addition of excellent, affordable tax software, i.e. Turbotax, it is almost too simple. Yet there are millions of "tax offices" in every city in America.

Once folks become personally motivated and read a few good investing books and peek in at a few groups like this one, most can easily learn enough to be successful as an investor.

 

[BigE]

Great thread. Have really enjoyed reading these posts. Kind of funny that this topic has come up now b/c I just gave my partner two books (Boglehead guide to investing and Jack's Common Sense book). He is amazingly sharp and probably has the highest mental biologic potential of anyone I have met (came from relatively poor family in MS and got in medical school in 3 years, etc). I am an incurable cheapskate and don't buy random gifts for my partners but he wants to learn more, so I thought I would oblige. Working in the medical profession, surrounded by many with 6 figure incomes, I am continually amazed at the lack of common sense with money management. If you read Millionaire Next Door, when the author describes Drs. North and South, I feel somedays like I'm surrounded by the Dr. Souths of the world.
And...although it is presumptious of me to say that being a grasshopper with all the anal planning and saving is a better path than being an "ant", I still think it beats the heck out of the stress of paycheck to paycheck living or working a menial job in my 70's.

 

[aja8888]

Scary stuff....good thread topic.

Two recent examples of how to do it wrong (or not at all):

My sister-in-law's son who works in Silicon Valley just allowed his in-laws to move in with them . He had to put a small addition on his house in Sunnyvale to accommodate them. Not because they (the in-laws) are physically incapacitated, but they dropped their entire retirement nest egg on a business venture (at 65 years old) in Pennsylvania. Bad news followed. Apparently they owe the IRS a good sum also. No one in the family is really talking about this situation.

My neighbor two houses away, who is a salesman for an electrical products company (wife stays home with the 5 year old son that they had @46 years old), recently asked me what to DO about their retirement planning. Apparently, they have not saved much and only have a small amount in his company 401k, of which they borrowed against for the house purchase a few years ago. I'm not sure what to tell this guy at his age (51) except put his wife to work and save her salary, which does not appear to be in the cards based on her spending habits. Plus the big mortgage, young kid, etc, etc....

What are all these people going to do when the work force no longer wants them? Not everybody can move in with their kids.

 

[rodi]

Financial education for kids can be found... if you look hard enough. My kids will both be taking a 3 week class in investments this summers at the Gateways School. And my older son's teacher does some lessons on interest, compound interest, etc during a math module... and she makes the kids model out loans and see how much interest is paid over the course of a mortgage.

But yeah - there are a lot of people who *should* know more about finances than they do. We're in the midst of our division being acquired by another company. It is shocking to hear how many people are freaking about the loans on their 401ks, and who contribute less than the matching amount. These are middle aged, very bright, engineers.

 

[Mulligan]

Scary stuff....good thread topic.

Two recent examples of how to do it wrong (or not at all):

My sister-in-law's son who works in Silicon Valley just allowed his in-laws to move in with them . He had to put a small addition on his house in Sunnyvale to accommodate them. Not because they (the in-laws) are physically incapacitated, but they dropped their entire retirement nest egg on a business venture (at 65 years old) in Pennsylvania. Bad news followed. Apparently they owe the IRS a good sum also. No one in the family is really talking about this situation.

My neighbor two houses away, who is a salesman for an electrical products company (wife stays home with the 5 year old son that they had @46 years old), recently asked me what to DO about their retirement planning. Apparently, they have not saved much and only have a small amount in his company 401k, of which they borrowed against for the house purchase a few years ago. I'm not sure what to tell this guy at his age (51) except put his wife to work and save her salary, which does not appear to be in the cards based on her spending habits. Plus the big mortgage, young kid, etc, etc....

What are all these people going to do when the work force no longer wants them? Not everybody can move in with their kids.

So I take it, you are not good enough friends to be blunt, huh? I am no financial guru, and have the backstop of a pension, but so do my friends and they are not in great position. 4 of them I have bluntly spoke to them. One has converted and seen the light. The other 2 recognize the problems they have created and are at least thinking about it. The fourth one won't bring it up anymore, so I do not discuss it anymore either. I got in their face about their finances because they have all wondered how I was able to retire so soon despite being in the same field and 2 of them making more than I did. We are good enough friends where we can have these lively/personal discussions though.

 

[aja8888]

So I take it, you are not good enough friends to be blunt, huh? I am no financial guru, and have the backstop of a pension, but so do my friends and they are not in great position. 4 of them I have bluntly spoke to them. One has converted and seen the light. The other 2 recognize the problems they have created and are at least thinking about it. The fourth one won't bring it up anymore, so I do not discuss it anymore either. I got in their face about their finances because they have all wondered how I was able to retire so soon despite being in the same field and 2 of them making more than I did. We are good enough friends where we can have these lively/personal discussions though.

With the SIL, it's their issue and her son and son's wife seem to be handling it. Crazy situation though.

With my neighbor, we just started this discussion last week and I'm not sure where to go without more details. I know their parents are passed (both sides) and whatever came of any inherited funds are probably long gone. In my conversations with him (and her in one), they are somewhat clueless and seem to take the path of "oh well, it will work out...somehow".

I mentioned a family will probably need upwards of $1 million to have a decent retirement in today's dollars 10 -15 years from now. That just opened their eyes. With a 5 year old at their ages, they are not well prepared to even deal with that. They have a 26 year old son who is gone from home on his own. I would suspect there are many families with similar situations that are unfamiliar with how to prepare for one's self in today's economic environment.

 

[Fishingmn]

I have another theory.

Others mentioned how money is a taboo subject but I think it's deeper than that. How many people here really share specific financial information with family and friends? For the most part, we don't even discuss how much we make, own, save or spend with our closest family including children and parents.

It's funny that people can share on on the E-R.org boards and bare their financial details in anonymity but wouldn't consider doing the same to the people we are closest to.

While lots of people in this thread have talked about education it's all done in the abstract for the most part.

The other thing I think is so critical is that how you save or what investment you save in is WAY less important than how much you save. I'm sure everyone on this board has made financial decisions they would like to take back (multiple for me). Saving 20-25% of ones income over a long period can make up for a lot of poor decisions even for things like using an adviser or buying a higher fee fund. The high consumption lifestyle is such a killer of long-term financial health.