The Big Picture for the Week of September 4, 2011

Earlier in the week someone tweeted a link to this article where a behavioral finance guy chopped down some of what the financial advising business is all about. I believe this can be useful to both financial advisors and do it yourselfers because do it yourselfers are also financial advisors, they simply cater to one client; themselves. The first thing that Ariely (the behavioral finance guy who wrote the article) attacks is the notion of basing a financial plan on what percentage of pre-retirement income is desired. Ariely believes that the right way to come at this is what type of lifestyle does the person want in retirement? He says that by framing the question that way, that many people will conclude they need much more income post retirement than pre-retirement. I’ve covered this before. A goal based on income has never made sense to me. Ariely’s idea, as laid out in the article seems incomplete in that if you believe we are collectively financially illiterate then what type of lifestyle do you want will lead to a lot of time wasted targeting exotic and expensive trips, a $150,000 sedan, a $500,000 motorhome and so on. The starting point should be expenses. Some expenses will go down and some will go up–some will go away altogether. My saying that such and such will be less is futile; we each have our own circumstance and what might go down for you might go up for someone else. Look at your expenses and figure out your own likely outcome. I say likely because at 50 or 55 you can’t know with...

The Big Picture for the Week of September 4, 2011

Earlier in the week someone tweeted a link to this article where a behavioral finance guy chopped down some of what the financial advising business is all about. I believe this can be useful to both financial advisors and do it yourselfers because do it yourselfers are also financial advisors, they simply cater to one client; themselves. The first thing that Ariely (the behavioral finance guy who wrote the article) attacks is the notion of basing a financial plan on what percentage of pre-retirement income is desired. Ariely believes that the right way to come at this is what type of lifestyle does the person want in retirement? He says that by framing the question that way, that many people will conclude they need much more income post retirement than pre-retirement. I’ve covered this before. A goal based on income has never made sense to me. Ariely’s idea, as laid out in the article seems incomplete in that if you believe we are collectively financially illiterate then what type of lifestyle do you want will lead to a lot of time wasted targeting exotic and expensive trips, a $150,000 sedan, a $500,000 motorhome and so on. The starting point should be expenses. Some expenses will go down and some will go up–some will go away altogether. My saying that such and such will be less is futile; we each have our own circumstance and what might go down for you might go up for someone else. Look at your expenses and figure out your own likely outcome. I say likely because at 50 or 55 you can’t know with...

Ideology Versus Reality

Yesterday I stumbled across a bit of a dilemma that I cannot offer a real solution to. Jonathan Hoenig had a post called Why Bill to Limit 401K Loans is Dangerous. If you are familiar with Jonathan then you probably know that he said the government should not meddle in these sort of personal finance matters, we should be free to govern our own affairs without big brother looming over us. Other than his failure to mention the tax writeoff for making 401k contributions I can’t argue against the ideology he expressed, actually I agree with it. I think people should be free to make all their good and bad decisions about finance matters and then own the consequences good and bad. The reality of this is far more complicated. It is complicated by the fact that collectively we have no understanding of the decisions we make, we don’t understand the consequences, we make poor decisions in terms of not saving enough, raiding our savings for things that are not necessarily emergencies, we buy high, we sell low, we spend wildly beyond our means, we have credit card debt out the wazoo, we take way too much risk, we don’t take any risk–this list could be endless. If the reality is that we collectively hang ourselves with most of our financial decisions then to paraphrase Jim Rogers the solution would not be to give us more rope. I was exposed to a mentality along these lines yesterday that I simply don’t know how to understand. I posted this article from the WSJ and pointed out the “debt is slavery...

Ideology Versus Reality

Yesterday I stumbled across a bit of a dilemma that I cannot offer a real solution to. Jonathan Hoenig had a post called Why Bill to Limit 401K Loans is Dangerous. If you are familiar with Jonathan then you probably know that he said the government should not meddle in these sort of personal finance matters, we should be free to govern our own affairs without big brother looming over us. Other than his failure to mention the tax writeoff for making 401k contributions I can’t argue against the ideology he expressed, actually I agree with it. I think people should be free to make all their good and bad decisions about finance matters and then own the consequences good and bad. The reality of this is far more complicated. It is complicated by the fact that collectively we have no understanding of the decisions we make, we don’t understand the consequences, we make poor decisions in terms of not saving enough, raiding our savings for things that are not necessarily emergencies, we buy high, we sell low, we spend wildly beyond our means, we have credit card debt out the wazoo, we take way too much risk, we don’t take any risk–this list could be endless. If the reality is that we collectively hang ourselves with most of our financial decisions then to paraphrase Jim Rogers the solution would not be to give us more rope. I was exposed to a mentality along these lines yesterday that I simply don’t know how to understand. I posted this article from the WSJ and pointed out the “debt is slavery...

Sunday Morning Coffee

The New York Times Magazine posted an update on Iceland that had some great quotes and thinking (as opposed to talking) points. First up was this comment from an Icelander who did not get caught up in the excess; “I thought there was something wrong with me because I wasn’t taking millions in loans,” he admitted. “Everyone had brand-new cars and built big summer homes and boats. You felt like a loser or something if you didn’t have it. This is the feeling that many regular people felt if they weren’t making trillions, but maybe we weren’t so stupid.” When Joellyn and I went in 2006 I noted how many young people there were driving very expensive cars. As seen in real time this was either evidence of success or excess and given all the cranes we saw on the way in from the airport it certainly seemed like prosperity and one way to look at it was that this was somewhere on the spectrum of success building to excess. The Icelander quoted above managed to not get caught up in what was going on, was content with what he had and so survived it better than most. People in the US with enough common sense to not buy a house by borrowing 120% of the price going in or take on four flips at once also fared better than most (one would hope anyway). A number of people suggested to me (the author of the article) that the nation, as a whole, was going through a period of intense introspection and that the consensus seemed to be that...

Sunday Morning Coffee

The New York Times Magazine posted an update on Iceland that had some great quotes and thinking (as opposed to talking) points. First up was this comment from an Icelander who did not get caught up in the excess; “I thought there was something wrong with me because I wasn’t taking millions in loans,” he admitted. “Everyone had brand-new cars and built big summer homes and boats. You felt like a loser or something if you didn’t have it. This is the feeling that many regular people felt if they weren’t making trillions, but maybe we weren’t so stupid.” When Joellyn and I went in 2006 I noted how many young people there were driving very expensive cars. As seen in real time this was either evidence of success or excess and given all the cranes we saw on the way in from the airport it certainly seemed like prosperity and one way to look at it was that this was somewhere on the spectrum of success building to excess. The Icelander quoted above managed to not get caught up in what was going on, was content with what he had and so survived it better than most. People in the US with enough common sense to not buy a house by borrowing 120% of the price going in or take on four flips at once also fared better than most (one would hope anyway). A number of people suggested to me (the author of the article) that the nation, as a whole, was going through a period of intense introspection and that the consensus seemed to be that...