I once read actor and economist, Ben Stein, share a story on Yahoo Finance about a time when he was a child in the mid-1950’s. He came home from school and excitedly told his father, also a popular economist, that he had learned that the world would quickly begin running out of food in 10 years. His father casually dismissed it.
Young Ben, now even more frustrated replied, “But Dad, figures don’t lie!”
His father smiled and said, “Figures don’t lie, but liars figure.”
This might sound silly to us now, but this kind of scarcity is still being taught today by politicians, financial advisors, and even some of our passionate Facebook friends (you know who you are)!
This is especially true when it comes to the lies taught in financial planning and traditional investing!
What I want to do is point out the discrepancies I learned when I was a financial planner teaching the very things Dave Ramsey teaches in the image above. I get frustrated with Dave because I believed in the same lies that he publicly promotes. After meeting and teaching thousands of people across U.S. and Canada, I have seen some destructive myths.
I will point out the myth, the eternal principle it violates, and the solution. There are several, but I will only point out the common ones from Dave’s Twitter post.
Myth #1 – Financial advisors and experts know better than you
Principle Violation – Personal Responsibility
As a recovered financial advisor, I was taught how to sell products to you and teach you things in such a complex fashion, that you wouldn’t be able to know that truth. As one advisor taught me, “Teach them that money is hard and that they can’t do it themselves. Then, they will learn to just trust you as the expert.”
Bull! Most people I meet have more common sense than financial planners or the Dave Ramsey’s of the world. Principles govern money matters much better than products. Have you ever had a moment where you really wondered if what they taught really works? Have you ever wondered if the numbers they teach you are real? Have you wondered if they are just promoting something to you because they sell it?
Ever wonder how teaching money from a scarcity mentality of sacrifice, save, suffer, spend nothing, and do nothing fun, until you’re retired, would really work?
By the way, go to Calculator.net and try putting in Dave Ramsey’s numbers of $100 a month for 40 years at 12% interest. Did you get $979,310.10 too? Oops! What’s $200,000 anyways? However, how many of us assumed he was right?
See my point? This is part of the reason why I had to leave financial advising. When did we turn off our brains and start trusting salespeople in suits more than ourselves?
Solution – Question everything you have ever been taught about money, what their self-interest is, and things will become more clear. Question me too! Take responsibility for your own learning and life!
Myth #2 – Rates of returns are real
Principle Violation – Misleading math
This one is one of the biggest lies people tend to believe. In the early 2000’s, I used to teach that the average return of small cap stocks was 12%. I would show that number like crazy. To be conservative, I would even say 10%. I would then put it into a calculator and show you how awesome that really is.
That all changed for me when an annuity sales trainer tricked us with the following question:
“If you have $10,000 and lose 50%, what are you left with?”
We reply in unison, “$5,000!”
“Good. Now, what is the rate of return you need to get back to $10,000?”
“Wrong! Making 50% on $5,000 is only $7,500. You need 100% to break even again. So what’s the average return of losing 50% and then gaining 100%?”
At this point, we’re puzzled.
“25% per year, and you only broke even! This is why we’re introducing our indexed annuities because the average return is not the real rate of return.”
This floored me. I realized that although the S&P 500 market claims it “averages” more than 10%, the real return (actual yield) is only about 7%.
What does that mean? It means that if you went off of Dave’s numbers above, you would only have $248,551! And that’s IF you get market returns. At 6%, that number decreases to just over $191,000. At first, I couldn’t figure out why more middle-class clients that I had that saved for decades would rarely have more than $300,000. Now it had all become clear to me….
Financial advisors have been guilty of over-promising and under-delivering for decades! Why hasn’t anyone called them on this yet? It’s because they are protected by disclaimers like “past performance is not indicative of future results.” But aren’t people mainly investing with them because they’re showing the big numbers?
However, every time they use “average” returns, they ARE lying! Very rarely do I see people have more money than what they were shown, and that’s when people bought 5 years ago at the market low. Just yesterday, I had a client who was frustrated and ready to get out of his IRA’s and 401k’s because the balances have stayed relatively the same for the last 15 years.
Because the actual return was only a few percent. But when you tack on the fees in your retirement accounts (that are not included in your rate of return), it barely clears 0%.
By the way, some of the most expensive mutual funds aren’t sold by typical financial advisors. They’re sold as your company 401k. It’s not too uncommon for the total fees to be near 2% or more per year. What this means is that even if you were lucky enough to actually yield a 7% return (most likely because you’re getting an employer match), you may only see a 5% return!
Oh, and at 5% in 40 years, you’d have just under $149,000. See the problem? And we haven’t even talked about the taxes you still need to pay yet, have we?
P.S. Dave Ramsey actually believes that a widowed spouse can pull out of their mutual fund 10% per year without ever touching the interest (see here). Even financial advisors find this hard to believe!
Solution – See thru the “figures that don’t lie” and understand what the real numbers have been. Then decide if it’s worth the risk.
Myth #3 – High risk creates high returns
Principle Violation – Something for nothing
What is risk? In financial advising terms, it’s defined as “a chance of loss.”
So when did a 70% chance of losing equate to a 70% of winning?
Does risky behavior work anywhere else? For instance, if I took high risks with my health (smoking, drinking, eating McDonald’s daily, etc.), would I become healthier? If I actually let my kids “go play on the freeway” like my parents told me to do, should I have more children?
So why would taking more risks, investing in things we don’t understand, investing in things where we have no control, and it adds no value to anyone (other than financial institutions and financial planners’ pockets), actually produce better returns? The lottery is pretty high risk too. Why not cash out all of our retirement plans and play Powerball?
Most of us don’t bank on the lottery for retirement because it doesn’t make common sense! So why are we losing control investing in things that don’t provide any real value?
Corporate America isn’t better off because your money is with them. You just hope to ride someone’s coattails and make whatever table scraps are left over after all of the real investors are paid.
The real problem here is that you expect to receive something for nothing. Throwing money into investments with no promises of returns is gambling where you expect to receive something without adding any real value. This is different if you are actually investing a significant amount in a company that helps them out. This is what Warren Buffet does.
When you invest in mutual funds, you don’t actually invest in the companies. Your returns come from the price of the mutual fund, not necessarily the stocks, bonds, etc that they are investing in. The price of the mutual fund can go up and down, regardless of the stocks they invest in.
Therefore, when you take high risks, you are only increasing your chance of losing. This is how you are a gambler. Personally, I don’t like to gamble. I like the solution below.
Solution – Only “take calculated risks” by investing in things that you can have some control over. If you can’t control it, make sure you have contractual guarantees. Financial freedom is only possible if you feel you have control over your finances.
Myth #4 – Everyone should be a millionaire in 30-40 years
Principle Violation – Money and math aren’t the same
How much is $1 Million worth in 40 years?
We can’t trust the government statistics because they have a vested interest in showing lower inflation so they don’t have to raise social security up as much – See more at www.shadowstats.com
However, over the last several decades, we have seen that buying power seems to be cut in half about every 10-12 years. Let’s just assume the inflation rate is only 5% a year. Even if you did have $1 Million, the actual spending power of that money in 40 years is….
Just under $167,000!
By the way, financial advisors are starting to say that you should only live off of 3% of the money in your savings because you don’t want to run out of money. If you had $1 Million, you would only pull out $30,000 a year.
To use this inflation example above, you would only have the spending power of $4,000 a year!
See a problem here?
If you’re 25 years old right now hearing about how amazing it would be to be a millionaire, you’re going to be seriously disappointed. Go ahead and ask a 65 year old is they thought they would be rich at 25 if they had $167,000 in the bank back in 1974. Also ask them if they ever had any curves thrown at them in life that slowed down their ability to save. How does a financial advisor take into account lay-offs, market declines, unexpected kids, unexpected kids moving back in or asking for financial help, health issues, etc? They don’t! They put your life into a nice little calculator.
Your life was never meant to be put into a calculator, and a calculator can’t predict your life!
On top of that, what happens when you haven’t saved enough? Just keep working into your 70’s like many are doing right now?
So now that you might feel depressed at this point, here’s the solution.
Solution – Focus on what frees up and generates cash flow for you RIGHT NOW! Don’t wait until you’re 60 or so and then plead for help because you realized my prediction was right. Change it right now!
In conclusion, I point this out, not to discourage you, but to liberate you from bad advice that still hasn’t worked! Every person I have ever met has hope to not become another statistic.
The question remains the same – Will you continue buying into the figures that “don’t lie”….
OR, will you do almost the exact opposite by taking personal responsibility without the high risks, seeing the truth as it is, and taking charge of your finances today?