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

[daylatedollarshort]

I think advertising and TV shows have a lot to do with why people are broke. Advertising is a whole science aimed at getting people to spend more and more money. There are no commercials on TV telling people that they should really clean their homes with baking soda, vinegar and reusable rags. No one makes money that way except of course the end consumer, who could put all those savings towards early retirement or financial independence.

On TV shows, people often live outsized lifestyles compared to their incomes. Dates are often at expensive restaurants and night clubs instead of walks at free public parks followed by a picnic.

There are very few ads for people to save money and the ones that exist are usually for rip off investment advisers. There are no TV ads for TIPS and I bonds. At our local bank the teller and supervisors had to huddle and get out their procedure book to figure out how to sell us I bonds. They had never heard of them before.

People watch 30 hours of TV a week. That is a lot of exposure to commercials and unrealistic lifestyle expectations and the message to spend, spend, spend instead of save, save, save.

 

[Donzo]

It is interesting that some are investers and others never think about it.
I got into saving and investing early on - I loved to make spread sheets and figure how long it would take to get to various "mile stones". I would read Money Mag from cover to cover and get excited reading the stories of folks that were further along than I was (finance porn). YMORL changed my life.
I have friends (my age) that are making more than I ever did and they still have little interest in managing their investments........it's just not on their radar

 

[ERD50]

I've seen the same thing and it is a mystery to me as well.

Along with the other comments of lack of education and motivation, my only guess is that the financial industry has been so very successful in convincing people that this is so complex that one needs to pay them for their help. We've seen DIY investing compared to a DIY appendectomy.

-ERD50

 

[Mulligan]

I think advertising and TV shows have a lot to do with why people are broke. Advertising is a whole science aimed at getting people to spend more and more money. There are no commercials on TV telling people that they should really clean their homes with baking soda, vinegar and reusable rags. No one makes money that way except of course the end consumer, who could put all those savings towards early retirement or financial independence.

On TV shows, people often live outsized lifestyles compared to their incomes. Dates are often at expensive restaurants and night clubs instead of walks at free public parks followed by a picnic.

There are very few ads for people to save money and the ones that exist are usually for rip off investment advisers. There are no TV ads for TIPS and I bonds. At our local bank the teller and supervisors had to huddle and get out their procedure book to figure out how to sell us I bonds. They had never heard of them before.

People watch 30 hours of TV a week. That is a lot of exposure to commercials and unrealistic lifestyle expectations and the message to spend, spend, spent instead of save, save, save.

I agree with you on the I Bonds, as you made me smile about my encounter at the Bank when I purchased some a few years ago. I practically had to jump behind the counter to shepard them through the entire process. I started off with me having to explain to them what they were and convince her that yes you do sell these to customers.

 

[nun]

Me too. Engineer who took econ. Since I chose the elective, I actually cared. The other students who had this as a "flunk out" course for their majors (like physics in engineering) just slept through class.

I learned way too much in my second class which was focused on government finance and taxation. That's yet a whole different issue, but one that is hitting home these days. So you think people are bad at their own finances? True. But they are even more clueless as to how our government works financially.

There are lots of scientists and engineers on here (physicist myself) so maybe "smart" people are good at finances.

The only finance course I've had is "accounting for technical managers", no personal finance courses at all. But I learned a lot form my mum and dad and then from 18 onwards had to survive on a student grant in London without any credit so I got good at budgeting. We got a lump sum 3 times a year and that had to pay for rent, food, beer (that was a big cost), books, travel etc......I put money aside for the essentials and just made sure I didn't spend more than I had and I saved any excess into a high interest savings account. I use mutual funds now and retirement accounts, but not much has really changed.

 

[donheff]

It doesn't surprise me at all. People who are not inherently interested see the initial learning curve as a hurdle, just as with IT, nutrition and other topics mentioned above that many smart people ignore. Couple that with the potential impact on your lifestyle - if it really is complicated and you blow it your F'd - and it is no wonder that many people don't try DIY.

 

[Mulligan]

Fantastic thread, and a truly perplexing problem.

It hit home to me when our long time neighbor across the street was foreclosed. He "owned" the home for 30 years! WTH?

Well, after they retired, he did a whole bunch of idiot things which I won't get into detail. But the crux was he kept taking out second mortgages on the home to finance things like $100k+ motor homes.

The guy was smart. Computer programmer for my first Megacorp. I was shocked and astounded by the turn of events. Just plain stupidity.

Blows your mind, doesn't it. I have a friend who him and his wife are college educated. They have lived in the same house since 1981. As of last year, they owed more on it now, than the day they bought it over 30 years ago.

 

[GrayHare]

Perhaps the reason is there are so many reasons, as illustrated by the posts so far.

Some people simply value other stuff more than money, whether it's the fancy car, party lifestyle, expensive trips, or even charity (such as priests). Some are more comfortable without wealth, as illustrated by lottery winners who too often return to their familiar poverty.

For some it's just easier to not think and plan for the future, and instead leave the problem to someone else. In Aesop's The Ant and the Grasshopper fable the grasshopper dies, but in western world today the grasshopper's way is subsidized, such as in the following "UK version" of the fable at http://www.freerepublic.com/focus/f-chat/2176589/posts

The list is long: inability to delay gratification is another reason.

 

[misty57]

Actually, I don't think it takes a lot of intelligence, but an interest and a willingness to take the time to teach yourself about personal finance and investing. Then even if you have the knowledge and understanding, it also takes some self-discipline to LBYM (which I think is a problem for a lot of people) so that you actually have something to save and invest.

I am almost 100% positive that I have "average" intelligence. What I had going for me is that I had an "natural interest" in money and personal finance. I realized in my early 20s that the only thing that I "knew" about money was to steer clear of consumer debt, which was huge. That was way before 0% interest loans . I knew that I needed to teach myself more, so I went to the library and picked up a huge stack of Money magazines and started teaching myself.

DH will ER this year at age 56, but only because we were "smart enough" to know that we weren't very smart, took an interest in learning (an ongoing process), figured out very early that if investment advisers were so "smart" they'd all be rich, and most importantly were willing to deal with a bit of delayed gratification (LBYM).

If you had had a crystal ball 33 years ago and had told me what our net worth would be today, I'm pretty sure I would have told you that you'd been smoking the funny stuff.

 

[Grigori]

Just like 10, 20, 30 years ago everyone around is on getting a professional job, moving up the ladder as fast as possible, and being the one dying with the most toys.

No one every talked about taking care of personal finances. Certainly not in my family or circles. It was mysterious, or something left to brokers.

I was in debt until I was 38. Fortunately, I read Tightwad Gazette, Your Money or Your Life, and got released from needing to spend every cent of my paycheck trying to pursue happiness with things I could buy. I love that sense of freedom that grows every year with investing the surplus.

That's what people don't get - the freedom.

 

[Midpack]

Interesting replies. It seems so far the whys include:

• Lack of (personal finance/investing) education
• Ability and interest are not necessarily correlated
• Simple 'keeping up with the Joneses' is a (much) higher priority
• [edit add]Some people plan to work as long as they can, retiring isn't a priority (yet)

If I missed another, it's unintentional.

 

[nun]

I also feel that being frugal isn't perceived as desirable. With an economy that is consumer driven we are constantly encouraged to spend. That pressure comes from advertising and also from family and friends and it's difficult to resist.......we have many insults for frugality (tight wad, meanie, "he's careful with his money" usually accompanied with a wink) and it's very rare for people to see regular saving and frugality as a thing to admire. Dickens has a lot to answer for this as Chrismas Carol has forever given us Scrooge and made it a bad thing to be concerned about money unless yo spread it around and spend it.

 

[Katsmeow]

OK. I will fess up as one of the clueless Midpack is talking about. As many here know, I am an attorney.

I remember in my mid-20s getting a job in a firm and there was another young lawyer who also got a job. She was very interested in the firm's Keogh plan and was berserk when the head of the small firm we were with didn't make contributions. I thought she was nuts. At that point, I had no interest in retirement. I figured that we needed to concentrate on doing well and making money and there would be plenty of time later to think about retirement.

My own parents were very, very frugal and I felt like I had been let of prison when I got out on my own. So I went hog wild with consumption spending. (Not saying it is wise....)

It took me many, many years to get more frugal (really just the last 10 years or so). I was just talking with my 18 year old son today who had applied for a summer job in a nice shopping area near us. He told me he felt poor when he was there. I pointed out he was wearing $250 shoes and is driving a nice (used) Prius. He then told me that we don't live like the other kids he knew in high school (private school). He pointed out while we gave him a 3 year old Prius when he turned 18, it was common that his friends were given a new Mercedes or other nice car when they turned 16. He said their families had similar income to us, but spent way more money. (He wasn't complaining, by the way. Just making the observation).

So - why do they do this? From looking at myself and others that I come across through work, I would say several things:

1. Many do not have any interest in retiring. They plan to keep making hundreds of thousands of dollars a year indefinitely. They may plan to "cut back" at some point, but that's all. If retirement is not a goal for you, then you don't really plan for it. They usually aren't worried about disability as their employer usually has a decent long-term disability plan.

2. These are smart people who, in general, think - rightly so - that you get what you pay for. They know that, for example, the attorney in the strip center charging $100 an hour is probably not at the same level as the attorney charging $500 an hour in a prestigious firm. They also are used to expecting themselves and everyone around them to be better than average. So - let's say they can invest in a Vanguard index fund with .10 expense ratio OR they can go to an advisor who charges 1% a year and puts you into funds with high expenses. They are predisposed to the latter because they think that the latter will result in better results than an index fund that just wants to be average.

3. People tend to act like everyone around them. When I was younger this was a real issue for me. I was around people who had a lot more money than me. Not just attorneys, but clients who were truly very wealthy. I wasn't wealthy. But it is very easy to get sucked into the norm of those around you. If everyone you know is going to eat at the expensive restaurant that costs $50 an entree then it may not occur to you to go have dinner at IHOP or even Chili's.

4. People think they know more than they know. The classic example of this in my experience is physicians. As clueless as many attorneys are at finances, physicians are 100 times worse. I can't tell you the number of times I've seen physicians who invested in some screwy deal that was supposed to be so smart and make so much money and the physician didn't realize that the people setting up the investment were making all the money from the physician. My perception is that the physicians were very uncritical, believed everything they were orally told, and didn't read the actual documents and just signed what they were handed. I often felt that they thought that because they were so smart at medical things that they were smart at everything else.

 

[daylatedollarshort]

With so much advertising, it is easy to just do the activities and buy the goods that get publicized by advertising instead of seeking out inexpensive alternatives.

I know the Mr. Money Mustache blog is a bit controversial here, and I don't think his retirement numbers really add up or that being self employed equals being retired, but he does have a lot of good ideas on how to live well for very little money compared to your average consumer.

On one money makeover blog post, he told someone to stop going out to eat while they had huge student loans. It was like borrowing money to have someone serve you coffee. I thought that was a a unique and frugal way to look at restaurant expenses that most people really don't think twice about.

 

[W2R]

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

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.

 

[Bestwifeever]

I think DH and I fall in the lucky fools category.

 

[killingme]

The most important advice I ever got

The most important advice I ever got came from my father a ninth grade educated machinist who worked ten hours a day and lived on coffee and Camels filter-less...always spend your last dollar first. Stuck with me my entire life. You really think about how you spend the last dollar in your pocket if you are a couple day away from payday.

People in general don't think that way and have been conditioned to be acquisitors. They are taken in by the real estate salesman's "...but it's only another $200 a month" (on the thirty year mortgage for a house which was beyond their affordability and from which they will refi so as to buy the car they "need"), or say "I NEED the iphone 5". They may want it, but they certainly don't need it. I want a pony but don't need it .

I think most folks here from the short time I have been here are the 1% who have a goal, a clue, and the know the difference between want and need and have been willing to forego immediate gratification to make it happen.

 

[nun]

IHOP or even Chili's.

That's fancy.....I'm more Subway.

4. People think they know more than they know. The classic example of this in my experience is physicians. As clueless as many attorneys are at finances, physicians are 100 times worse. I can't tell you the number of times I've seen physicians who invested in some screwy deal that was supposed to be so smart and make so much money and the physician didn't realize that the people setting up the investment were making all the money from the physician. My perception is that the physicians were very uncritical, believed everything they were orally told, and didn't read the actual documents and just signed what they were handed. I often felt that they thought that because they were so smart at medical things that they were smart at everything else.

Your perception of physicians agrees with what I've observed, I work at a medical school. I think it comes from their training where they absorb a lot of information and don't really have to think critically. Most doctors are not like House, they just implement standard procedures given a set of data. If the data doesn't fall into a pattern they recognise they pass you onto a specialist, who then applies the same approach. Critical thinking is often discouraged in medicine as it can lead to more trouble than benefits.

 

[JoeWras]

I remember in my mid-20s getting a job in a firm and there was another young lawyer who also got a job. She was very interested in the firm's Keogh plan and was berserk when the head of the small firm we were with didn't make contributions. I thought she was nuts. At that point, I had no interest in retirement. I figured that we needed to concentrate on doing well and making money and there would be plenty of time later to think about retirement.

Wow, I think you hit something there.

Heck yes, the LAST thing we want to worry about when fresh out of school finally making money was retirement. And then one day you wake up, and have a "holy ----" moment, and it is possibly too late. I think that is a factor.

For me, my parents were frugal. A few VERY good things they did.
1) Dad and Mom bought me and my siblings 2 company stocks, 1/2 of their money, and 1/2 of my savings. I hated that my bank balance went down. We were about 10 years old. Every day, Dad had me look the price quotes. One stock was a utility - boring, but we were on dividend reinvestment. That was fun to watch. The other was speculation. It was an oil exploration stock. It was the 70's. 2nd crisis hit and it went up. We sold it and plowed it into the utility. I learned a TON from this experience. I suggest you young parents do this with your kids. It doesn't have to be much money, ours wasn't. But it keeps interest.

2) Dad and mom were thinking about retirement, and some of their friends started moving away. This was when I was in high school. They had me late in life. This helped me wake up to retirement a lot. If your parents are young, you'll miss this.

 

[haha]

Triggered by another thread, this phenomena has always puzzled me to no end. It's been noted here countless times, but the "why" has not often been discussed.


While I had some employees who unfortunately may not have been capable of handling money for themselves, many with HS educations could. But even more, I have some technically accomplished friends who are almost clueless about investing, retirement planning and even personal finance. Among them (most without pensions):

• An attorney
• A small IT company owner
• Several engineers
• Several doctors, medical specialists
• An accounting manager (this one really amazes me)
• A small business owner

I know them well, and it's obvious from the questions they ask me, especially since I retired early, how naive they are about money. Some of them contribute 10% to a 401k and invest in target funds, and then assume all will take care of itself. They've never even estimated a portfolio goal or annual spending. One just sends his money to his guy at EJ and knows little else, couldn't tell me what it was invested in, but wondered if I had any "hot stocks" for him. Another has been paying Mass Mutual 1% per year for well over 20 years to manage his money! I met with his MM advisor, a nice guy who was clearly just parroting MM recommendations without much underlying knowledge of his own - charging 1% per year!

I want to just shake them and ask WTH, but I know better than to provide investing advice to family and friends, especially when they haven't even asked.

I have never understood how otherwise very smart people can be so uninterested in their own financial security

How do you suppose that any of us would know? It is about like asking a compulsive bather how people can let themselves get stinky.

Uh, I don't know, do you?

Ha

 

[Brett_Cameron]

I never got anything financial-wise from my mom, but I did watch her struggle, which was education enough for me!


As far as it being taught in school, I can't put the weight on it all being ignored by the system. We were required to take two financial classes for graduation from my high school, which taught about retirement savings, compounding interest, saving money, even the average salaries for varying degrees and occupations, pensions, social security, vehicle loans, mortgages, just about everything up for discussion here.

You had to take one freshman year, Keystone, and one senior year, Capstone, or no graduation for you. To this day on Facebook, people I graduated with complain about how 'these are things we should have been taught in school!' I distinctly remember them sleeping and spitballing their way through both of those classes. We graduated only two years ago, and they've already forgotten that they even took the classes, nonetheless the content.

So even when the education is shoved in our faces (It helped me, just by paying the slightest bit of attention), people just don't seem to care until they've already dug themselves into a pit of despair.

I graduated HS way back in the dark ages in 1973 and college in 1977. My perspective is from that era. I know that I resolved at a very young age to not be in the position where utilities were being cut off because of money issues, like I observed several times growing up. Growing up, family finances were a taboo topic for we the children to know about or discuss.

I have a son in HS now. His school has a personal finance elective course but he elected not to take it before I found out it was available.

I am glad that there are signs that the education system is slowly started to address this important life skill area. Thanks for sharing!

 

[Lsbcal]

....(snip)...
I have never understood how otherwise very smart people can be so uninterested in their own financial security

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.

 

[FinanceDude]

I have posted on this before. I have found in my experience that the smartest people often see to have the hardest times managing their own finances. And, it's NOT because they are not smart enough, or they are lazy, etc. Money is a strange animal. Some people that are 100% logical in the rest of their lives can't deal with personal finance and investing. Money is a very personal, intimate, emotional deal for these very smart people, and many have a hard time dealing with it.

 

[Brett_Cameron]

On a brighter note, one of my adult children has solicited my advice on budgeting and finance matters. My high school son has told me he wants to teach him how to budget and manage finances.

 

[scrabbler1]

"Why are so many smart people clueless about the IT that they rely on so much?

Why are so many smart people clueless about health, nutrition, fitness, etc.?"

Because....they all know who the Kardashians are and how many times they've been married, and who is being "kicked off the island"...and what the latest expensive gadget is they can own for "only a hundred dollars a month-that's less than cable!!!"

And they BUY things based on the monthly payment, and lastly, they do the "no money down" and then chase depreciation for the rest of their lives.


That's what I think!

Great thread we have here. Lots of fine posts to read through, keep them coming.

I agree with you, lcountz. Way too many people know way too much about the most inane things. Sometimes, when I am at my ladyfriend's place, she is watching the tail end of one of those garbage shows like "The Voice" or "American Idol" and the first thing I tell her is that I can feel my IQ dropping a few points as the show airs LOL!

I was an economics major at NYU in the 1980s, so I always had an interest in this stuff. I did not grow up in a particularly financially savvy or wealthy household, but my mom did show me about basic financial stuff when I was a kid simply by helping her prepare the monthly checks to go out. She also listened to a man named Dr. Bernard Meltzer who had his own radio show back in the 1970s and 1980s. Bernard Meltzer - Wikipedia, the free encyclopedia She learned a lot from him and passed along to me a few good nuggets of advice. In 1990, after I bought my co-op apartment (using advice she got from Dr. Meltzer; stop throwing away money on rent when you can deduct most of the housing costs on your taxes) she pointed me in the direction of Fidelity Investments so I could earn tax-free interest through muni bond funds.

She knew she had planted a seed in my mind and it would soon grow into a broader knowledge about investing and investments. Sadly, she would pass away in 1995 at age 59 and not see me become rather wealthy and retire at 45 in 2008. But she also made sure in her final months to make sure my less savvy dad would on firm footing financially. Happily, he his still around to see the result of her gentle but good guidance she gave me.