The proliferation of personal finance blogs over the past decade has, in many ways, been a boon to consumers. I’d like to think I’ve helped at least a few people with my personal finance blog over the years. But for every piece of good advice out there, it seems like there are 10 pieces of horrible, terrible, just flat-out incorrect advice.
1.) The Advice-Giver Doesn’t Know Their Audience
This photo has nothing to do with your portfolio, just like most financial advice.
Credit: Erin McAuley
I believe there’s no such thing as general good advice. Advice either applies to your situation or it doesn’t. There is advice that applies to most people just as there is advice that only applies to a minority of people, but there is no such thing as advice that applies to everybody.
A good example of so-called generally good advice handed out to anyone willing to listen is the advice to save as much as you can in your 401k plan at work. Now, this isn’t necessarily bad advice for the great majority of people, people with decent salaries and little debt outside of their home mortgage, but it’s absolutely terrible advice for others.
If you have tons of high-interest credit card debt, earn a relatively low salary, and are struggling just to put food on the table, you are one layoff away from disaster. In that situation, investing in a 401k plan would be stupid, even if you have to forgo a company match (yeah, I said it). ”But Kyle,” I hear you saying, “401k plans are often exempt from creditors during bankruptcy by many states. Such a person should save as much as possible in a 401k and then declare bankruptcy, having the credit card debt discharged.”
The above advice is likely technically correct, but it’s also completely inappropriate for this situation because such a person probably isn’t going to have the resources to get the kind of legal advice necessary to make that work. Furthermore, the social stigma against declaring bankruptcy keeps most people from declaring until long after it would be in their best interests to do so. The actual best course of action for this prototypical person would actually be to use that money to invest in ways to increase their income (going back to school for something marketable) instead of funneling it all into a 401k plan, which probably won’t be invested responsibly anyway.
Shielding assets in a 401k won’t fix the underlying problem: that this person just doesn’t earn enough money to live a decent lifestyle while still putting money aside for the future. Better to lose everything and increase your earning power than shield a few thousand from creditors in a workplace retirement plan.
But since the advice-giver doesn’t know you or your situation, how are they really going to be able to give you good advice? They can’t. All they can do is give general advice that hopefully applies to the broadest audience possible. There’s nothing necessarily wrong with this, but you need to take into account who the author’s primary audience is before taking her advice to heart. Suze Orman’s advice may work for plenty of people, but you shouldn’t automatically assume it will work for you.
2.) Most Advice-Givers Assume If Something Worked For Them, It Will Work For Anybody
It’s idiotic, of course, to assume that just because something worked for you it will work for somebody else, but it’s a very prevalent (albeit often subconscious) attitude. Other bloggers have tackled this topic before, and I agree. Just because you happened to get into pork belly futures at the bottom and made a fortune doesn’t mean telling everybody to invest in pork futures is good advice. Ditto with real estate, fast food franchises, income-producing websites, small-cap stocks, or anything else you can think of.
This is all well and good, but I think it actually has far broader implications than most of us realize.
There are no guarantees in personal finance.
“Past performance is no guarantee of future results” is a phrase every investor has read a million times. Have you ever actually thought about what it means? It means exactly what it says: that past performance is no guarantee of future results. What most of us don’t grasp, however, is that it applies to the entire financial system!
Officials and experts quote stock and bond returns going back to 1926 and even earlier to justify the current self-funded American retirement system. When things go badly, the common response is “well, he just didn’t save enough, ” or “well, she invested poorly,” or “well, insert-any-lame-excuse-here.” That could very well be, but there’s also a much more disturbing possibility: the system itself failed. Stocks have done well over the past century. Will they do nearly as well over the next? Maybe not. History is rife with examples of the stock markets in large, rich, industrialized nations tanking for long periods of time without recovering. Germany and Italy Before World War II and Japan since the early 90′s are but a few of the more famous examples. It is possible, however improbable, that the advice EVERYONE is giving will turn out to be wrong.
Just because a few recent generations have been able to retire on the back of generous stock returns is no guarantee our generation or the next will be able to.
3.) There Are Just Too Many Variables At Play
My third point is a natural consequence of the first two: there are just far, far too many variables at play for me to be able to give you intelligent financial advice without knowing your financial situation. Do you have debt? A high earning potential? Dependents who rely on your support to survive? Any unique skills? Without knowing these things, it’s difficult to give good advice. Nobody knows your circumstances better than you do. How, then, am I to give you better advice than you could give yourself?
The best I can do is say “if you have a similar background to me, have somewhat similar goals, have a job that pays about as well as I do and live a similar standard of living, you might find what I’m about to tell you useful.” Understandably, the truth doesn’t sell and so we get superficial, generic financial advice that may or may not apply to our situations and even if it does, there’s not enough detail to act on it anyway.
But Don’t Be Discouraged
I’m not saying you shouldn’t get your financial advice online. To the contrary, there’s a ton of great information out there. All I’m saying is you have to view the advice you get online through the lens of the author’s experiences and your own situation. Don’t assume just because a seemingly-knowledgeable person is saying it, that it must be true. In other words, trust but verify.
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