The Great Truths
April is Financial Literacy month. I have mixed feelings about financial literacy as a ‘thing’. I do think it’s a huge problem that our schools teach us about the Romans and the Greeks, Subjunctives and Superlatives, Trigonometry and Calculus and NOTHING about money, how to manage it, or what it means in our life.
But on the other hand, studies have shown that traditional financial literacy classes do nothing to increase positive financial behaviours or improve financial health.
Why is that?
Well, it’s because it’s almost impossible to be rational about money (as Dan Ariely says, we are predictably irrational). Our brains are wired to do it all wrong. You can understand all the complexities of one type of mortgage versus another, or everything there is to know about a lease agreement, but when it comes to making a financial decision your psychology and the biases you don’t even know you have are going to take over.
What is useful though is understanding a number of money truths that if you can internalize and live your life by, they will almost certainly lead to a richer existence in every sense of the word.
Here is a list of money truths as told by Dr Daniel Crosby on his Standard Deviations podcast (my notes are added in italics). Daniel is a behavioural finance expert and a well-regarded speaker and writer. I highly recommend both of his books, The Laws of Wealth and The Behavioral Investor.
1) The Joneses aren’t as rich or as happy as you think. I promise you this is true. See a past blog post I wrote about the dangers of ‘Keeping Up’ .
2) Get rich quick and get poor quick are both sides of the same coin.
3) The more complicated the investment advice the more expensive and the less useful. Complicated advice always seems enticing, but simple ALWAYS beats complex when it comes to investing.
5) The only sure thing about stocks is that there are no sure things. If anyone ever tells you they have a ‘sure-thing’….run.
6) Stocks tend to pay well precisely because they hurt to hold. The hurt comes from uncertainty. Uncertainty gives us the return. If you don’t want to take on the uncertainty, you lose the return.
7) Your mortgage broker is lying to you about how much house you can afford. Of course, it all goes back to how they are incentivized. Charlie Munger once said ‘show me the incentives and I will show you the outcome’. ALWAYS make sure you understand the incentives of any financial services provider, particularly those selling something. I wrote about incentives here.
8) A raise in income shouldn’t mean a raise in lifestyle. Lifestyle creep is pervasive in Cayman. Earn more, spend more – a dangerous combination that puts financial freedom further and further out of reach. As I wrote here, the key is to make more money without wanting more stuff.
9) Forecasting is for weatherpeople. As Galbraith said ‘the only function of economic forecasting is to make astrology look respectable’. I wrote about this here.
10) Excess is never permanent and the truest words in financial markets are ‘this too shall pass’. Those four words are almost all you need to know when it feels like we are in a crisis.
11) You will never ever feel like you have enough money. I agree that if you are left to your own devices this is probably true. However, part of my work as a REAL financial advisor is to help my clients get to the point where they know what is enough and reach what Brian Portnoy calls ‘funded contentment’.
12) There is an inverse correlation between performance and time spent watching financial news. The mainstream financial media is about the worst place you can go for financial advice.
13) If it depreciates, don’t pay interest on it. Cars, boats….
14) You don’t have to be rich to invest but you do have to invest to be rich.
15) Infrequent splurges bring the greatest happiness. The problem is when the splurges become frequent and you end up at #8.
16) If it seems too good to be true, it probably is. It always is.
18) If you’re excited about an investment, it’s almost certainly a bad idea. Good investing is always boring.
19) Market corrections come as regularly as your birthday, Santa Claus and the Easter Bunny, so expect them. Expect them and embrace them (refer back to #6).
Know these 19 things and your financial health will stronger than almost everyone else around you. It’s not about maths or calculators or spreadsheets or ‘financial literacy’, it’s about your behavior and your brain.