How To Manage Personal Finances Book: Chapter 3- How Complexity Harms Investors
Author’s Note:
I am posting a text version of this entire book on Substack, and video versions on YouTube. Email ken@stltest.net for details on the book’s publishing date in late ’24 or early ’25.
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Complexity is harming investors
Here’s a CNBC article from April of 2022:
“As more cutting-edge investment products work their way into the marketplace, there’s growing fear retail investors and even professional brokers are getting in over their heads.”
Note the end of the sentence- it’s important. Investing may now be too complex for professional brokers, those who do investing for a living. Complex product offerings is part of the problem:
“The Financial Industry Regulatory Authority, or FINRA, considers leveraged and inverse ETFs, equity indexed annuities and reverse convertibles as complex products.”
I was in the investment business for years, I stay informed- and I’ve never heard of an inverse EFT. I guess the joke is on me…
Thousands of choices
Consider this: The more investment choices there are, the more your investment advisor must learn- and monitor- to stay informed. So how many investment choices are out there?
Mutual funds- they’re straightforward right?
Over the past 40 years, individual investors have used mutual funds with great success. However, Statista reports that there are over 126,000 mutual funds (as of 2020).
What about exchange traded funds (ETFs)- another investment product used by individual investors. Statista reports over 2,200 ETFs in the US as of 2020.
Warren Buffet, possibly the world’s most successful investor, says “Don’t invest in businesses you don’t understand.” With so many choices, it’s hard to make decisions and understand your investments.
Is your insurance agent or CPA soliciting your investment business? You’re not alone.
Too many advisors
In the late 90s and early 2000s I trained over 1,000 people in a test prep course to become licensed as investment advisors though FINRA, the regulatory agency. I worked for a company that is now part of Kaplan, and I taught a 40-hour course once a month (one of the hardest things I’ve ever done).
Many of the people in my classes were CPAs and insurance agents who were moving into the investment advisory field. This trend creates confusion for investors, because professionals in other fields are now licensed as investment advisors.
Wait, I though Bob was an insurance agent- why is he asking about my retirement plan?
Not making a decision is a decision. If we simply pass on making a decision, our problems can compound and get worse.
Problems compound: an example
“He can’t lick his butt- that’s why he’s got an infection and losing weight.”
I hope she’s talking about a dog, I thought.
As I walked by and heard more of the phone call, it turned out that the woman was a vet, and she was on the phone with a client.
Both humans and animals often have medical complications and one issue can cause multiple problems. A patient might have bad teeth, for example, and doesn’t eat well. He loses weight and starts having problems related to poor nutrition.
Problems compound- and we all should avoid compounding problems when dealing with personal finances.
Let’s move to a discussion of your personal finance goals.
What are your goals?
Here are some examples that may apply to you:
I want to make smarter decisions about spending (not let money fall through my fingers).
Covering unexpected expenses is frustrating. I need an emergency fund to pay for car repairs and other surprises.
My goal is to buy a home or apartment in five years. I need to save and invest for a down payment.
I’d like to retire in 20 years, and I need an investment fund to cover expenses in retirement.
Setting up an emergency fund may be a short-term goal, while funding retirement is a long-term goal.
Why goals matter
The reason why you’re reading this book is to help you reach your goals. That’s the payoff for putting in the time and effort to learn about personal finances.
So, when the process feels difficult, remember your goals.
Having goals also gives you direction, and that helps you stick to your goals.
Why am I not spending more on a vacation this year?
Oh, that’s right: I committed to save more money for that down payment.