Most of us are pretty bad at getting healthy, both physically and financially. In both cases, there are HUGE, MONEY-PRINTING INDUSTRIES that, purportedly, help us achieve physical health and financial health. Me wonders if there’s a connection…
I don’t have any statistics at my fingertips (Research is hard…let’s go shopping!), but I’m gonna go out on a limb and say that, as a nation, we haven’t gotten physically or financially healthier over the decades that the health industry, in particular, the nutrition industry, and the personal finance industry have been “helping” us.
The parallel has been drawn before, but I found particular inspiration in one of Michael Pollan’s book, In Defense of Food, in which proposed his very simple diet advice: “Eat food. Not too much. Mostly plants.”
Nowhere does he mention counting calories. Or buying a particular food product. Or a specific diet. If you’re a triathlete, alright, I’ll give it to you that you should probably be a bit more specific about your nutrition, but for the rest of us bozos just trying to not have to buy a pant size up? If we could abide by that rule, we’d be so much healthier.
It got me to wondering: What would the Michael Pollan of the financial industry say? And what can we learn from the nutrition industry to help us navigate the finance industry successfully and safely?
Product is King
I’m old enough to remember a depressing number of nutrition fads:
- Eggs are the enemy. No, they’re wonderful.
- Ditto fat.
- Ditto carbs.
- Ditto meat.
- Ditto dairy.
Which is less of a commentary on my age (I’m only 41, people…holy shit, I’m 41) and more of a commentary on the nutrition industry’s need to constantly put out new ideas in order to keep you on the hook. Aaaand of course a commentary on which lobbying group is currently pouring the most money into research.
In most of these diets, the key to success, to health, is to be sure to buy these here food products, or as Michael Pollan calls them, “edible food-like substances.”
Here’s what I imagine the inside voice of the food-product industry sounds like: “Changing how you eat is hard. No one wants to do that. And guess what, you don’t have to! You just have to change what you eat. And luckily, I am selling the very thing that you need to consume that will make you healthy with no effort.”
So, if eating the right products is the way to physical health, surely buying the right products is the way to financial health, right? That’s certainly what a big part of the financial industry wants you to think.
The Snackwell® Cookie of Finances
So, whadda we got in the financial world that will solve all your problems, without you having to do much other than fork over some money? The flavors are limited only by human imagination. And when that much money is on the line, people get Mighty Imaginative. To wit:
- Premium financed equity indexed universal life insurance
- Whole life insurance
- Variable annuities policies inside IRAs, with a variety of riders
- Non-traded REITs
- Unit Investment Trusts
- Equity indexed annuities
- Universal indexed life insurance
- Shares in limited partnerships
- Precious metals
- Long-short mutual funds
- “High-yield” <cough: Junk> bonds
- Leveraged stock funds
Oh, Wait. That Didn’t Work.
Once you try subsisting on just Snackwell cookies for a while, or Zone® bars, or what have you, and you realize you haven’t lost and kept off any weight, you’re not any healthier, you might realize, hunh…that didn’t work. And then you have two choices: Try another product, or change your behavior.
Let’s assume you finally see the light and try to change your behavior instead of shifting to another nutrition product. You can do that fairly simply, quickly, and cheaply.
But there are some big differences between nutrition products and financial products, which can make financial products so much more damaging:
- It’s a lot harder to tell if financial products are working. If you don’t lose weight or drop a pant size or lower your glucose level, then your food products aren’t working. But who, praytell, can actually understand what’s going on inside a premium financed equity indexed universal life insurance policy?
- If you do figure it out, you probably can’t stop using it simply, quickly, and cheaply. There are costs to get in (commissions) and also out (surrender fees). Also, the product is probably designed to provide benefit only over the very long haul, so getting out early means you’ve got nothing but downside.
- The cost of a bad financial-product decision could be thousands of dollars, not the $5 that box of Snackwells costs.
The Science-ish of Personal Finance
Michael Pollan talks about “nutritionism,” which is nutrition, but fed through a machine of profit-motivated industry and reductionist modern scientific processes, and transmogrified into something like nutrition, but not quite. There’s a lot of scientific-sounding gobbledygook around it, though, so it’s gotta be right. Right?
Instead of eating an apple, we’re supposed to get enough Vitamins A, B, and C. Instead of eating kale, we’re supposed to get a certain number of grams of fiber, Vitamin K, and iron. As a life-long consumer of food, I have to say, this approach sucks the common sense and enjoyment right out of it.
In personal finance, the industry does the exact same thing. Cap ratios and participation rates and Alpha and Sharpe ratios and…aahh! “I can’t possibly understand it all but it looks science-y, so I’ll take it.”
Bamboozlement wins the day.
Simplicity is sacrificed to the “science” of investing, personal finance, and nutrition. But, it turns out it’s not Rocket Science, no matter how much that advisor wants to convince you it is. And if you can’t understand it, it ain’t because you’re not smart (pretty sure you are). It’s because the product is meant to make the seller rich, and if you understood that, you wouldn’t buy it.
Financial Rules of Thumb
To repeat, Michael Pollan’s rule of thumb about nutrition is:
Eat food. Not too much. Mostly plants.
I think the closest analog in the world of personal finance is:
Earn money. Spend less than you earn. Invest the rest.
Save more, spend less, and don’t do anything stupid.
(attributed to Dick Wagner, CFP®)
In the spirit of financial science-ish, people often poo-poo rules of thumb. I think they’re kind of great. They won’t optimize your situation, but they’ll make you better off than most other choices would.
Here are a few more rules of thumb for your finances:
- Save ⅓ of your income, spend ⅓, and put ⅓ to housing.
- Save at least 15% of your income for retirement.
- Keep your debt-to-income ratio below 36%.
You can quibble about the specifics of any one of these rules of thumb, but the underlying message is always the same:
The key to long-term financial success is to save enough.
Managing Your Behavior is Essential
You’re going to cultivate financial strength, reach your goals, and gain confidence when you have the right behavior, not when you buy the right product.
Sure, there are some technical topics that really do merit a deep technical understanding (not gonna lie and say restricted stock units in a privately held company are simple to understand and plan around). But for most of you, for most of your financial life, if you are able to continually follow rules of thumb like these, you’ll do better than trusting in someone else’s snake oil.
And that is the essence of good financial planning: The easy part is the simplicity of the tasks. The hard part is actually performing those tasks, day in and day out, year after year. Not being swayed by financial news media, friends and family, or financial professionals who want to line their pockets with your future financial security.
[Post script: There are several financial professionals I admire and enjoy because they are, basically, the Michael Pollans of the industry. If you’re interested, check out Jason Zweig (author and Wall Street Journal columnist), Jonathan Clements (author and former WSJ columnist), and Dan Solin (whom I’ve only just recently gotten to know a bit, but his video series about investing delights me no end).]
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.