Fear of Finance
Far out in the uncharted
backwaters of the unfashionable end of the
western spiral arm of the Galaxy lies a small
unregarded yellow sun. Orbiting this at a
distance of roughly ninety-two million miles is
an utterly insignificant little blue green
planet… This planet has - or rather had - a
problem, which was this: most of the people on
it were unhappy for pretty much of the time.
Many solutions were suggested for this problem,
but most of these were largely concerned with
the movements of small green pieces of paper,
which is odd because on the whole it wasn't the
small green pieces of paper that were unhappy.
- Douglas Adams, Intro to A
Hitchhiker's Guide to the Galaxy
My colleague wants a bento, asks me if I want a
bento, goes out, brings me back a bento, gives
me some round pieces of metal, and I give him a
piece of green (actually blue) paper. Food for
paper, brilliant (and some pieces of metal on
the side). Everyone's happy, the bento shop
owner, my colleague, and myself - as long as I
can keep producing the pieces of blue paper. The
pieces of paper will serve to satisfy many of my
needs on this little blue green planet. Not all
of my needs, admittedly, but many, including
some very important ones. Funny stuff, money.
The problems with the
movements of the green pieces of paper are
myriad and economists love to disagree about
them. The crunch one is when you can't come up
with the pieces of paper yourself, have nothing
to hand over, and are either reliant on the
indulgence of others - very common in childhood,
but later in life, not so - or, in the end,
forced to scrounge on the leavings of others
(old half-eaten bentos, etc, and cardboard boxes
to live in - if you're lucky).
However absurd it may be in
concept, this money stuff, the metal but
especially the paper, is vitally necessary. And
we have very complicated attitudes to it, egged
on by greed, and laced with fear. Greed for
more, and what it can get us - or simply lust
for more; fear of not having it, fear of losing
it.
Fear of losing it especially
since for most of us money is hard-earned, so
the loss (should it happen) causes high-grade
resentment, even heartbreak. We know we can only
earn for a limited span, realistically, after
which, if we do not have a sufficient supply of
blue paper, we do not have a sufficient supply
of blue paper. Fear of wasted effort, wasted
hope; fear particularly (and particularly as we
get older) of an uncertain and unprovided
future.
Add to that bafflement - for
the circulation of the stuff is highly
mysterious and fraught with technicalities that
vastly entertain the economists. Even most of
the economists have a degree of bafflement on
the topic, and the ones that don't are unbaffled
only through impenetrable arrogance.
And ignorance - not the
economists perhaps, but the average bento-buying
public. So many of us simply do not understand
money: how to keep it, how to grow it, how to
plan it. At school, we are taught, and some of
us learn, numeracy (directly useful in the money
area) and literacy (again useful, especially if
applied to small print), and a host of other
things such as history and geography and
chemistry and languages and even economics. But
how many people can honestly say that at school
they were taught how to handle their own money?
Oh yes, we learn through trial
and error, which basically comes down to: bad
experience, don't do that again (often we need
to repeat the loop a few times before we get the
message). And sometimes through successes,
although these normally seem to be the successes
of others, and personally elusive. Most of us
face our financial future fazed by bafflement
and hampered by ignorance. These jokers on top
of an emotional base of fear make for a very
unhealthy and judgement-debilitating complex.
* * * * * * * * * * * *
I'm not saying that everyone
approaches their personal finances and financial
future thus disadvantaged. A few exemplary
individuals have a considered game-plan and a
rational attitude towards implementing it that
they stick with in a disciplined fashion. Some
have a game plan but at crucial points lose the
plot on the implementation. Some do not have a
game plan but flounder valiantly. Some
blissfully exude ignorance of the whole area.
And some cussedly deny the importance of saving
money, while being all the time very very
worried about it.
Here are a few classic quotes,
naming no names, but all from observation. If
you have the time, talk them through with
someone you respect who also has the time. At
least, make a note what you think on each one:
1. I want my money safe so I
keep it in the post office/bank.
2. There's no point saving now because I'm too
young. I'll start later when I need to.
3. I didn't start saving and now it's too late.
4. It's OK. I have a state pension.
5. I don't need to save. I know I'll hit the
jackpot/make a killing in the markets one day.
6. I have no time for conservative investments.
A "steady" return will never do the trick.
7. The stock market has been great recently. I'm
going in with both feet.
8. Stocks are too risky. You never know when the
bad news is going to come out.
9. After all this saving, when I retire life
will be great.
10. All people working in finance are sharks.
11. Offshore investing is dangerous.
12. I don't have a savings plan as I have a
friend who had a bad experience with one some
time ago.
* * * * * * * * * * * *
Here are some comments:
1. I want my money safe so I keep it in the post
office/bank.
Safe against what? In the long run the account,
"safe" or not, will lose the race with
inflation, even though there maybe deflationary
interludes along the way. Furthermore, the
safety of government guaranteed accounts is long
term questionable as, if there was a major bank
wipeout, or government squandering of post
office savings, it's unlikely that a government
could pay out in full to all deposit holders.
Government options would then be either default,
or printing money (= igniting inflation). In a
democracy, which do you think they'd choose?
2. There's no point saving now
because I'm too young. I'll start later when I
need to.
You won't always be young, unbelievable as that
may be now. Save for five years and park the
money for ten: you'll have 11% more than if you
wait for five years and save for ten, even
though in the latter case you have put in double
the money*. The money you invest when young
works hardest because it works longest. You owe
it to yourself to put aside a minimum of ten
percent of your after-tax income, now. Play
compound interest with lump sums over periods
such as thirty years. It's instructive. Play
again, adding in regular contributions. When you
receive this, your older self will thank you
immeasurably.
*12% annual tax-free growth assumed here.
3. I didn't start saving and
now it's too late.
You missed an opportunity, yes. The longer you
have left to save, the better. But as long as
you have income to save, it's never too late.
4. It's OK. I have a state
pension.
It's not OK. Most state pensions even now are
inadequate. And the changing demographics of
countries with state schemes will make state
pensions less and less viable. There will be
fewer working people contributing to pension
pools being spent on more and more retired
people. You will need a private scheme to be
comfortable.
5. I don't need to save. I
know I'll hit the jackpot/make a killing in the
markets one day.
Good luck. The chances are against you.
Lotteries are brilliant investments for
governments. A high proportion (c. 90%?) of
people attempting to make killings in markets
come out as losers. Of course, the winners
really do make a killing!
6. I have no time for
conservative investments. A "steady" return will
never do the trick.
It's true that conservative investments at bank
account-type rates will not solve your long term
problems. There are investments available,
however, that are cautious, low-volatility, with
possibilities of a 15~20% annual return; many of
these are capital protected (i.e., even if they
don't go up, you get your money back). A
diversified portfolio should have a core of
conservative investments that are unlikely to go
down, and appreciate by a fair amount.
7. The stock market has been great recently. I'm
going in with both feet.
It has. Many people think that therefore it will
continue to go up because it did. And probably
it will, for the time being at least, with a few
corrections along the way. But it can't go up
forever. Major tops are not reached again for a
very long time (The Dow Jones Industrial Average
top of 1929 was next surpassed in 1953; that of
1966 was next surpassed in 1993, inflation
adjusted). When stock markets go up, they can
really go up. But exercise caution. Go in with
one foot, and look before you leap.
8. Stocks are too risky. You
never know when the bad news is going to come
out.
Individual stocks and whole markets can suddenly
fall without prior warning. But in the long term
well-chosen equities will give your portfolio
the muscle to out-perform inflation. Individual
stocks can have hidden bad news. Mutual funds
can give balanced exposure to particular stock
sectors or countries, spreading the risk while
still giving you opportunities.
9. After all this saving, when
I retire life will be great.
Only if you've done very well in the savings
game. Retirement is a long holiday, during which
your earnings most likely will only come through
investment. And you don't know how long you will
be retired for. How long will your money last?
How long will you last? And what will your
medical bills be like? With sense, discipline
and patience you should be able to make yourself
comfortable. Perhaps, very comfortable.
10. All people working in
finance are sharks.
Some are. The vast majority are not. There are
regulations designed to prevent shark attacks.
The best means of prevention lies in your own
hands, however: not believing in promises of
impossible returns, using common sense, vetting
the shark-suspect, and employing those skills
you did learn at school to check claims and see
if things add up financially.
11. Offshore investing is
dangerous.
There are more than fifty offshore centres
around the world. Some are strictly regulated
and highly reputable; some are lax and
disreputable. Again, it's a matter of checking.
Considering the long-term compounding of
investments, it's dangerous not to take the
opportunity of offshore investing, if you have
it. Your assets will grow far more quickly in a
tax-free environment.
12. I don't have a regular
savings plan as I have a friend who had a bad
experience with one some time ago.
The normal problem is that the "financial
advisor" who introduced the plan suggested too
high a monthly or annual premium, or misled the
prospective plan holder to sign up for an
unrealistically long term without explaining the
punitive charges for discontinuing. There's
nothing wrong with regular savings plans
themselves, properly understood, and properly
fulfilled. There are problems with unscrupulous
financial advisers.
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