Personal finance ignorance among the otherwise intelligent

[tmm99]

I seem to remember we had a doctor/surgeon who was an active member of this board for a few years, who had saved a lot, but was very risk averse. All of his money was in very safe low-yielding investments.

I do remember him. He was an OBGYN and did a lot of volunteering with Doctors without Borders, right? He had all his money in CDs or something like that? If you're extremely risk-averse, I guess that's what you'd do. My former boss moved all his money in his 401K to a short-term fund (or was it a stable value fund?) in 2008, after the stock market crashed. He got laid off right after that (and his wife had quit working a few years earlier) but he bought a house in a dip (200K?) and he tells me his SS and his wife's SS have been fully covering all of their living expenses. He still has his money in his 401K, etc. - About a million total in CDs and stable value funds. If a person is extremely risk-averse and not hurting, there's no reason to venture out IMO. If I had, say, 10 million dollars, I would have no need to put any of it in the market.

I hope the OBGYN person is still doing all right.

 

[cyber888]

As an experienced trader, he should never have margined and created a high leverage trade. It's too common to hear hedge funds get wiped out in the millions.

Last night, we had dinner with a friend, whose father was a Goldman Sachs bond trader in Manhattan for 32 years. She grew up with limousines and even helicopters on demand. I know that her privileged upbringing causes less sympathy but she is a hard-working attorney and fully responsible person, whom we love as an amazingly good friend. We always assumed our friend would inherit many millions someday, and she might have assumed that, too. It turns out, she learned last week that her father was essentially wiped out through a margin call last year when the Covid recession struck. Beyond that, she doesn’t know how he was invested. He’s developed depression and other maladies and his remaining assets are being spent down so that he can go on Medicaid! We were shocked and saddened by her story.

This was in the same week that my 81 y.o. DF, thankfully, reached out to me before liquidating his brokerage account with Bankers Life to buy some exotic whole life policy that his Bankers Life agent was trying to pimp him. In that process, I discovered this agent has my dad invested 100% in a single high fee growth tech stock mutual fund. Apparently, this agent works the modest-income retirement community my DF lives in. As gently as I could, I explained the risks of this portfolio and he agreed to ask his agent if Bankers Life carries target date or retirement income funds. Sickening.

My dad is an engineer who has worked his entire life, and even continues part time employment at 81. He is good with numbers but could never be bothered to read a basic book on personal finance. He does seem to have avoided debt, thankfully, and he owns his little condo outright. He once had an IRA, which he liquidated 30 years ago to buy a cabin, which is now long gone.

Sadly, no matter how I slice the numbers he’s finally provided me, he’s looking at a 50% lifestyle reduction once he finally stops working. I’m just slack-jawed by these two examples of financial irresponsibility. Serenity Prayer time, I guess.

 

[audreyh1]

I am not certain why we would presume someone is competent with personal finance simply because the person has a good education and/or a good income.

How about if they were a Goldman Sachs bond trader for 32 years? I would expect some competency then.

However in the case of aging, that could easily undo any money smarts.

 

[ivinsfan]

How about if they were a Goldman Sachs bond trader for 32 years? I would expect some competency then.

However in the case of aging, that could easily undo any money smarts.

Sounds like he routinely lived above his means. Sometimes your luck runs out...

 

[427Vette]

I'm sure I'm the outlier here but in 1st grade a lady from the local bank came by and had us open a savings account (likely illegal now...forcing kids to deal with one bank); she also came by each week to collect our nickels to add to our account. (Hi Miss McMahon!)

In 6th grade we were taught how to balance a checkbook. In 7th grade we were taught about compound interest.

In high school we had some guy come in every month or so from an investment house and explain the basics of the stock market (I must have been asleep a lot; witness my questions on this forum!), how to read a balance sheet, inflation, the differences between bonds and stocks etc. We even had an investment club where we played with fake money/investments.

Of course this was a private school.

When my then girlfriend now my wife and I were juniors in HS we signed up
For an elective class called “consumer education and personal finance”. I have no idea why this wasn’t a required class from junior high through high school. We learned about investing, compounding interest, banking, insurance etc. I got more out of that one semester class than 4 years of other subjects combined. When HS graduation day came I searched out that teacher and thanked him for teaching this class. A few years later when I was just starting my business he hired me to do a bunch of work for him. I like to think that class helped seal the deal and convince my girlfriend to marry me!

I still remember a quote that teacher said. He said “rich people stay rich by living like they are broke. Broke people stay broke by living like they are rich”.

 

[427Vette]

I agree. Congress can't even abide their own budget and they should teach about personal finance?

I agree with this. I have worked for all kinds of people in our local government. It surprises me how many of them struggle to pay their personal bills yet somehow they are in charge of our finances.. Sad.

 

[REWahoo]

I have worked for all kinds of people in our local government. It surprises me how many of them struggle to pay their personal bills yet somehow they are in charge of our finances.. Sad.

No reason to think lack of personal financial skills is limited only to the public sector. Our CFO had his car repossessed from the corp HQ parking garage.

 

[RetiredHappy]

I know that this forum scoffs at AUM fees that people pay. The good part about legitimate money managers, not Bernie Madoff type, is that people don't lose their entire investments. Whether it is the ignorance or people who want to be one step removed from making knee jerk buy/sell decisions, wealth management would work well for them. As long as the market is up, it is not difficult to pick winners. It is when the market is down, it will separate the people who are good level-headed investors vs. panic sellers. Wealth management companies provide that protection against panic selling - buy high / sell low.

 

[DrRoy]

I read an article this year which posited that your success with money is more about your mental attitude than your financial skills. It told of an average person (perhaps a school teacher) who built a multi-million dollar estate through LBYM and many years of regular investing, and an executive from Merrill Lynch who went broke in 2008-9 from conspicuous consumption and leveraged exposure.

 

[Nick12]

Mental attitude is all that in regards to financial skills and everyday life. A brain surgeon can perform a task in surgery that many cannot due but if he doesn't give a hoot to learn or care about his financial skills then all bets are off. A guy who is a business executive that graduated from a prestigious MBA school hardly cared about changing his oil in his car. He advised he just waited for the oil light in his dashboard to come on to remind him.

 

[finnski1]

No reason to think lack of personal financial skills is limited only to the public sector. Our CFO had his car repossessed from the corp HQ parking garage.

Well that is funny.

 

[donheff]

I'm sure I'm the outlier here but in 1st grade a lady from the local bank came by and had us open a savings account (likely illegal now...forcing kids to deal with one bank); she also came by each week to collect our nickels to add to our account. (Hi Miss McMahon!)

In 6th grade we were taught how to balance a checkbook. In 7th grade we were taught about compound interest.

In high school we had some guy come in every month or so from an investment house and explain the basics of the stock market (I must have been asleep a lot; witness my questions on this forum!), how to read a balance sheet, inflation, the differences between bonds and stocks etc. We even had an investment club where we played with fake money/investments.

Of course this was a private school.

I may have mentioned it here somewhere but my 11 year old grandson was involved in a fantasy stock club at school (real tickers, fake money). He was good and got hooked so I opened a custodial account at Schwab where he could by and sell stock "slices." He has invested all of his Xmas and birthday cash in the account and done pretty well. Now his younger sisters have accounts and he is their FA. A few weeks back he called to ask if he could walk over to check out his investments (he has to log in to my account to access his so he does his trading here). He added, "I'm stopping at Starbuck's on the way over, can I get you something"? I'm thinking this guy may be my FA when I start going down hill.

 

[braumeister]

"I'm stopping at Starbuck's on the way over, can I get you something"? I'm thinking this guy may be my FA when I start going down hill.

Great FA, and he probably sends you a birthday card as well!

How much does he charge?

 

[finnski1]

I may have mentioned it here somewhere but my 11 year old grandson was involved in a fantasy stock club at school (real tickers, fake money). He was good and got hooked so I opened a custodial account at Schwab where he could by and sell stock "slices." He has invested all of his Xmas and birthday cash in the account and done pretty well. Now his younger sisters have accounts and he is their FA. A few weeks back he called to ask if he could walk over to check out his investments (he has to log in to my account to access his so he does his trading here). He added, "I'm stopping at Starbuck's on the way over, can I get you something"? I'm thinking this guy may be my FA when I start going down hill.

That's awesome. I like to joke that when I was 11 I could barely tie my own shoes Though I can't remember and hopefully I was able to by then!

 

[FIRE'd@51]

Last night, we had dinner with a friend, whose father was a Goldman Sachs bond trader in Manhattan for 32 years. She grew up with limousines and even helicopters on demand. I know that her privileged upbringing causes less sympathy but she is a hard-working attorney and fully responsible person, whom we love as an amazingly good friend. We always assumed our friend would inherit many millions someday, and she might have assumed that, too. It turns out, she learned last week that her father was essentially wiped out through a margin call last year when the Covid recession struck. Beyond that, she doesn’t know how he was invested. He’s developed depression and other maladies and his remaining assets are being spent down so that he can go on Medicaid! We were shocked and saddened by her story.

I sure would like to hear more details about this story. I doubt that someone who worked at GS for 32 years (and was probably a partner and/or managing director} years was ignorant about personal finance. I would hope your friend continues to try to find out the details of his investments.

 

[scrabbler1]

I'm sure I'm the outlier here but in 1st grade a lady from the local bank came by and had us open a savings account (likely illegal now...forcing kids to deal with one bank); she also came by each week to collect our nickels to add to our account. (Hi Miss McMahon!)

In 6th grade we were taught how to balance a checkbook. In 7th grade we were taught about compound interest.

In high school we had some guy come in every month or so from an investment house and explain the basics of the stock market (I must have been asleep a lot; witness my questions on this forum!), how to read a balance sheet, inflation, the differences between bonds and stocks etc. We even had an investment club where we played with fake money/investments.

Of course this was a private school.

Besides being an outlier in general, I'm sure I'm an outlier in the personal finance area like you.

I remember as a kid, starting around 10 years old (early 1970s), helping my mom out when she wrote the checks to pay the monthly bills. She had a spiral notebook where she posted the month's payments on a single page. I didn't do much more than seal the envelopes and put an address label on each one, but I gained an understanding on how the process worked. She also showed me how to balance the checkbook. And when tax time came around, I helped her complete the income tax forms, using pencil and paper and maybe a calculator. (I guess this is why I never had any interest in using software programs or hiring a CPA.)

Later on, my mom got me started on investing in mutual funds for my non-retirement money, even if it weren't for anything beyond muni bond funds. I already was investing in my employer's 401k although at the time (late 1980s) they had only 2 funds to choose from (stable value and SP500). I would later branch out into other types of funds.

Sadly, she passed away nearly 26 years ago at age 59, so she never saw the result of the wonderful seeds she planted in me (and she was a home gardener), culminating with my early retirement. She did well in home-schooling a personal finance education in me.

 

[finnski1]

Besides being an outlier in general, I'm sure I'm an outlier in the personal finance area like you.

I remember as a kid, starting around 10 years old (early 1970s), helping my mom out when she wrote the checks to pay the monthly bills. She had a spiral notebook where she posted the month's payments on a single page. I didn't do much more than seal the envelopes and put an address label on each one, but I gained an understanding on how the process worked. She also showed me how to balance the checkbook. And when tax time came around, I helped her complete the income tax forms, using pencil and paper and maybe a calculator. (I guess this is why I never had any interest in using software programs or hiring a CPA.)

Later on, my mom got me started on investing in mutual funds for my non-retirement money, even if it weren't for anything beyond muni bond funds. I already was investing in my employer's 401k although at the time (late 1980s) they had only 2 funds to choose from (stable value and SP500). I would later branch out into other types of funds.

Sadly, she passed away nearly 26 years ago at age 59, so she never saw the result of the wonderful seeds she planted in me (and she was a home gardener), culminating with my early retirement. She did well in home-schooling a personal finance education in me.

Sounds like you had a great mom! 59 is much too young.

 

[Markola]

I know that this forum scoffs at AUM fees that people pay. The good part about legitimate money managers, not Bernie Madoff type, is that people don't lose their entire investments. Whether it is the ignorance or people who want to be one step removed from making knee jerk buy/sell decisions, wealth management would work well for them. As long as the market is up, it is not difficult to pick winners. It is when the market is down, it will separate the people who are good level-headed investors vs. panic sellers. Wealth management companies provide that protection against panic selling - buy high / sell low.

A majority here might scoff but not me. We have AUM with Vanguard Personal Advisory Services for .35% for all sorts of interpersonal reasons and it might be the best money we spend. I view it as, first and foremost, cheap mistake prevention insurance.

I sure would like to hear more details about this story. I doubt that someone who worked at GS for 32 years (and was probably a partner and/or managing director} years was ignorant about personal finance. I would hope your friend continues to try to find out the details of his investments.

She’s more concerned about her dad than how specifically he lost his shirt, so I felt I could only probe a little bit. On the other hand, it doesn’t really matter. If one buys on margin, they can lose far more than they have bet on even the S&P 500 when it tanks periodically. “Leverage” instantly becomes a crow bar turned back on you.

 

[jollystomper]

My personal observation is that many "educated" people still fall victim to these items:

1)Not thinking long term beyond the next large purchase.
2)Listen more to those who claim they can "beat the market", because, after all, we're smart, we should be able to beat the market, right?
3) Have heard of folks having financial problems but tend to take the "That can't happen to me, I'm too smart for that" attitude vs. the "wow, that could happen to be, what do I do to prevent it" attitude.
4) May be more tempted to push "keep up with the Joneses" for appearances ahead of invisible personal finance basics.

In addition, there are different types of education. For example, "book smarts" vs "street smarts", or "knowledge" versus "wisdom". Not everyone who is smart has street smarts, and not everyone who has knowledge has wisdom .

Sometimes the toughest action, when it comes to personal finances, is to not assume one's "smartness" in other areas maps to personal finance intelligence. At a recent family wedding I was talking to one of my nieces. She is 30, with undergraduate and graduate degrees from Ivy leagues schools and a law degree from a to law school, working for a large law firm and living with her parents while she saves to buy a house. The conversation turned to long term plans, and she mentioned about "I should invest in the market, but it seems so complicated to figure out what to buy". I told her about the basic approach to start simple, using a few broad index funds, dollar cost in, worry about individual stocks much later (if ever)... all of this was new news to her. But she took the "I need to learn more about this" attitude, and enjoyed me showing her the Bogleheads site, so I think the seed was well planted.

 

[Nick12]

In the 1979 Business Week ran an article " The Death of Equities ". How so wrong these writers were.

 

[JustCurious]

I was 18 or 19 years old and planning to buy my first car and I was talking to my uncle about my plans to get a car loan and pay it off as soon as possible because I don't like having loan payments, and he said "That's silly, you should always expect to have a car payment, that's a part of life."

I never forgot that, not because I agreed with him, but because it struck me how he had internalized being in debt as a part of life and it was silly to think about being debt free. I've always made it a point to have as little debt as possible and avoid car payments and I always think about what my uncle said as a counter example of how I do not want to live.

 

[Amethyst]

If he'd said, "A car payment is part of life," I could see it - just his personal philosophy. Calling you silly for wanting to be different was not very...avuncular! Or kind.

In our family, it was sort of a merit badge to get to where you could pay cash for a car. My parents didn't have much but they avoided debt any way they could.

In fact - I did not want to get a credit card (which I knew was just debt) until somebody explained that, as long as you paid it off every month, it was actually leverage - you could spread out your debt for 2-3 weeks and not pay any interest.

I was 18 or 19 years old and planning to buy my first car and I was talking to my uncle about my plans to get a car loan and pay it off as soon as possible because I don't like having loan payments, and he said "That's silly, you should always expect to have a car payment, that's a part of life."

.

 

[Nick12]

I was 18 or 19 years old and planning to buy my first car and I was talking to my uncle about my plans to get a car loan and pay it off as soon as possible because I don't like having loan payments, and he said "That's silly, you should always expect to have a car payment, that's a part of life."

I never forgot that, not because I agreed with him, but because it struck me how he had internalized being in debt as a part of life and it was silly to think about being debt free. I've always made it a point to have as little debt as possible and avoid car payments and I always think about what my uncle said as a counter example of how I do not want to live.

The way your uncle described - car payment, part of life etc is a perfect example of what fuels our economy, millions of Americans are slaves to debt.

 

[daylatedollarshort]

One of the dads in our area was a financial adviser for one of the big name investment companies. He coached kids sports teams, in part to court the parents as customers. He invited me in once for a free consultation so I went. He charged an annual fee to find the "right" money manager (which I assumed to be one of his golf buddies) for his clients, so he was charging a percent of portfolio annual fee on top of the golf buddy's annual percentage fee. The whole time I listened to his pitch I was just thinking you've got to be kidding me. After the two fees, taxes and inflation there wouldn't be any real portfolio growth, especially factoring in down market years. It seemed like a scam but the guy had a big, fancy office and a nicer house than ours so I assume he was making a good living.

We were kind of shocked to find out someone one of us knew from work in a tech field actually used this guy as her financial adviser and highly recommended his services. I have never understood how people who worked in a logic based field with college degrees would be so gullible to people like this and take so little interest in managing their own finances.

 

[Letj]

Kind of, but you know live by the sword die by the sword.. a goldman sachs market guy with that kind of margin exposure? Guessing he thought he was smarter then the little guy. How many little guys have GS squashed like a bug while laughing all the way to the bank?

There are so many ways to interpret those unfortunate circumstances that have nothing to do with so called karma. Life is such that anyone of us can have really unfortunate circumstances (even more so if we live a long life). It doesn’t matter if you’re rich, poor, good or bad. It’s just what it is.