A friend posted this article from Morgan Housel at The Motley Fool describing some bizarre things in the investment industry:
I can’t think of another industry:
…in which there is so much ignorance around costs…
…in which results matter so little…
…that is so important to everyone yet so few care about.
My friend adds:
Everyone is expected to make money to survive. Nobody is expected to know how to manage money.
— Christian Whitesides (@crwhitesides) April 26, 2017
And yet another friend was recently complaining about a relative whose finances he’d looked over: it turned out the relative was in a high-fee fund that had underperformed for the last 10 years (i.e. its entire existence).
That’s an epic “trip at the finish line” mistake: you spend all your time/money/effort getting educating an education and working so you can make money… and then you screw up and lose a % point or more every year for your entire life. Oh and of course it’s all compounding.
Massive missed wealth since you picked the fund that charged a point more in fees because you didn’t know any better.
This is really weird.
There’s a few things going on here that, taken together, don’t make a ton of sense:
Point 1: This is one of the most important decisions someone will make in their life: how am I going to invest all the money I’ve made over my entire life from my own blood, sweat, and tears?
Point 2: There’s a lot of people making money selling investments that aren’t fraudulent or illegal but are very costly, to say nothing of the investment’s actual performance.
Point 3: There is a METRIC TON of free advice online about finances and how to invest. The 80/20 rule fits perfectly here IMO and the only financial advice you really need can fit on a 3×5 card:
So there’s plenty of free information, this is a top-10 life importance decision, and yet people screw it up all the time to the collective tune of billions of dollars every year.
What the heck is going on?
- People think this is more complicated than it actually is so they’re afraid of it and avoid it altogether.
- People are so in the dark that they don’t realize how far into the “you-don’t-know-what-you-don’t-know” zone they are. I could see this being possible since a lot of K-12 public school systems don’t cover personal finance (mine didn’t).
- Online information actually is slowly fixing this problem, as evidenced by the recent massive moves into ETFs and passive investment funds. (But so many other confounding variables here, we’d need to see data on fees, etc. etc.)
- People just don’t care enough. They have other things to worry about on a short-term basis, and “what’s my retirement fund ROI net of fees” isn’t exactly top of mind.
- People are irresponsible and can make decisions that are not in their own best self interest (This goes down the rabbit hole fast, but IMO I think you run into trouble real fast when you assume you know what’s in others’ self interest better than they do.)
- Talking about personal finances is taboo in the US so maybe information doesn’t travel well here. For example, if you make a poor investment decision you probably don’t go tell your friends/family “avoid this high-fee fund that I had my life savings in for 7 years”.
Of course it’s probably a combination of all of these and a bunch of other things I didn’t think of.2
As in most things I’m not sure what the big picture answer is here.3
But at a local level the answer is much simpler: read what’s on that damn notecard and be like my friend, make sure your friends and family are following it.
And this isn’t like, a behavior thing that’s hard to change. It’s not like we’re telling people to eat out less. This is a knowledge issue, not action.↩
You’ll notice that I didn’t mention anything about the investment companies (or the brokers) themselves. I think the best “fixes” to most problems are bottom up: empower the individual and they will know what is best for themselves. By saying the problem is “out there” (i.e. with the companies) we push responsibility of the problem onto entities over which we have no control. Better to focus on what we can actually do, which is to better educate ourselves.↩
Adding basic finance training to high school would be nice, but then again a ton of the educational system needs to be redone… it feels like pointing out that Comcast has bad customer service: 1. No kidding, and 2. the real problem goes much deeper.↩