Macro Economics
The End of Personal Finance?

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By washcomp
May 5, 2009

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There is nothing wrong with personal finance or financial planning. There is something wrong with giving children sharp edged tools and flamethrowers and then giving them erroneous and self serving mis-instructions on how to use them. If they don't hurt themselves its due to their ignoring advice or dumb luck.

I've made a decent living over the years by taking the "advice" given during my schooling (MBA, etc.) and re-casting it into something I thought was more useful. Following what they taught verbatim would have been destructive of the long haul. Some with investment advice. We all hear the same things, but maybe because I'm a cynic, I always try to figure out what the vested interest of the person giving me the advice is. I have admittedly missed making lots of money over the year by ignoring good advice. I have also avoided losing lots of money over the years by ignoring what turned out to be poor advice.

The biggest mistakes that I see in blindly following what appears to be good advice is a lack of understanding of risks, costs and alternatives. I ABSOLUTELY believe in diversification, for example. OTOH, the diversification techniques promoted by financial "experts" was that created by the financial industry and was simultaneously self-serving and destructive to wealth the first time the market tested the "mix" in the 1930's and continues to be dangerous to this day.

I'm not a financial adviser (nor do I want that responsibility), so I'm not going to tell you what I think you should do (especially because everyone's needs and resources are different). The one bit of advice I will leave you with is to THINK. Yes, of course gather information and learn how to understand it, but more importantly, put your goals down on a piece of paper. Put your resources and apparent cash flow down on the paper. Create a series of economic scenarios going forward to a comfortable time horizon (I use about 5 years) - include interest rates and price of the dollar. Make a list of as many classes of investments as you can (like bonds, US stocks, foreign stock, foreign currencies, residential real estate, commercial real estate, AND CASH etc. - you get the idea). You can even break these into sub-sectors (municipal bonds, junk bonds, financial equities, consumer equities). Now, plot how each of the commodity will likely behave over the timeline of each scenario. If they tend to move together, guess what - they do not provide diversification, regardless of what others tell you. If you are a mutual fund type of person (admittedly I'm generally not), examine the contents of a fund for similarity to another fund you might own. If they contain the same stuff, don't bother buying both - pick the one with the lowest expense ratio. If a fund behaves "too good to be true" (especially closed end funds) examine it VERY closely for use of leverage that might not be replaced. While we try to make money off the inefficiencies of the markets, generally they are pretty efficient (and a lot smarter than we are) - if it's priced cheap, frequently there's something "broken" hidden inside. There are few with any special "secret sauce" that the others don't use as well.

Pay attention to your losses and risk management. It is MUCH harder to "make it back" and far better if you never lost it in the first place. Do not fool yourself into thinking that investing is risk free. This is no different than going to Las Vegas in concept. We spread our risk across many tables, some of us hire "professional gamblers" to place our bets for us. We hope our "system" will beat the odds. Just don't get lulled into the false concept that any of this is necessary or healthy to your financial well being - you could get along just fine without most of this stuff. Use the table and chip values which make sense to you and DON'T BET ABOVE YOUR HEAD