Thursday, April 8, 2021

The Dumb Things Smart People Do With Their Money

Even smart people do some dumb things with their money, according to Jill Schlesinger, a Certified Financial Planner and media personality.  In her book, The Dumb Things Smart People Do With Their Money, she goes over thirteen common costly mistakes.  It’s an easy read that might change your mind about a few things.  The focus is on the U.S., and some detailed parts aren’t relevant to Canadians, but the broad themes are still relevant.

The parts of the book I liked best dealt with buying financial products you don’t understand, buying a house in situations that clearly call for renting, taking on too much risk, indulging yourself too much during your early retirement years, not having a will, and trying to time the market.

On the subject of buying investments we don’t understand, the author says “There just isn't any need to invest in gold,” and “It’s usually a crappy investment.”  On reverse mortgages, some predatory lenders “go to extraordinary (and sometimes illegal) lengths to foreclose on borrowers’ homes,” and “many people take out reverse mortgages without analyzing whether they really should stay in their homes.”

Schlesinger believes strongly in getting advice from fiduciaries.  It’s a mistake to take “financial advice from someone who is trying, first and foremost, to sell you something that will make him or her money, rather than help you.”

In an interesting twist, the author says you don’t need professional advice or a customized plan if “you have consumer debt,” “you aren’t maxing out your retirement contributions (presuming that you are in a high enough tax bracket for that to make sense),” or “you don’t have an emergency account with enough money in it to cover six to twelve months of expenses.”

The section on taking too much risk has an excellent discussion of recency bias.  I see this in myself every time I add new money to my portfolio, take money out, or have to rebalance.  These actions always call for either buying something that has performed poorly recently or selling something that has performed well recently.  I’ve learned to overcome my recency bias in these contexts, but the feeling of wanting to stick with an asset class that has been rising never goes away.  You need “to minimize how many direct investment decisions you make.  The fewer decisions, the less opportunity for your internal biases to wreak havoc.”

Schlesinger devotes an entire chapter to indulging yourself too much early in retirement.  This flies in the face of claims that overspending early in retirement doesn’t meaningfully contribute to the fact that the average retiree spends less with age.

In one section the author links the decision to delay taking Social Security with staying on the job longer.  Maybe that makes sense under U.S. rules, but in Canada, one can certainly benefit by spending savings while delaying CPP and OAS until years after retiring.

The author believes that the amount people can safely draw in retirement is “3 percent or so.”    This makes sense as a starting withdrawal percentage for someone age 60 or younger who pays investment fees above 1% per year.  Higher safe withdrawal amounts are for disciplined low-cost DIY investors or older retirees.

“The insurance industry wants you to think that you need permanent insurance, but most people don’t.”  Well said.

The section on not trying to time the market contains many excellent points.  Unfortunately, at one point the author quotes some DALBAR figures that supposedly illustrate investors’ poor market timing.  The DALBAR methodology for calculating investor returns makes no sense.  It’s true that individual investors aren’t good market timers, but DALBAR penalizes investors who buy into the market with new savings because they didn’t invest the money sooner (i.e., before they even had it).

Overall, this book is an easy read and makes many good points.  One of the downsides of being smart is that you can delude yourself at the same time you persuade others.  This can lead to excessive risk-taking and costly mistakes.


  1. I agree with the author on the professional advice points he makes. Or at least - that's the advice a professional should give.

    1. Hi Jim,

      It's not surprising that a fiduciary would say that people should seek out fiduciaries. But I think it is good advice for those with enough assets that a fiduciary will give them the time of day. The takeaway for those who don't have enough assets is that you should be wary of any advice you receive from non-fiduciaries.

  2. this whole fiduciary thing is a bit rich. they act like they are physicians paid by the state with no interest other than your well being, so help me god. for starters, let's acknowlege that anyone employed in finance is EMPLOYED. i've worked at a private PM firm, that was able to claim 'fiduciary' status. this small firm made their living by managing accounts for HNW investors. they were most definitely sales people, and without sales, there are no accounts to manage. they did nothing at all extraordinary or unique other than try and make client money grow, and get more of it. but oh, 'fiduciary', and the angels sing from on high. believe it or not, these guys did not wear superhero capes and they were the most aggressive, snakiest, slipperiest people i've ever met in this brutal business. secondly. who do you think determines fiduciary status? you? the client? i'll tell you who does, a court of law. fiduciary status isn't bestowed as a title, it's determined based on the nature of the relationship and knowledge imbalance, amongst a host of other intangibles that a judge would determine in the case of litigation where a client felt unduly cared for. i'm a financial advisor and a CFP (bet you're impressed) and each step of the way i'm only doing what's in my client's best interest. and *gasp* a fee is charged, business occurs and everyone is fine. anyone in this era who isn't behaving like a fiduciary is soon going to be without a job or will never find clients to work with. very very few advisors i know are in this boat, regardless of who bestows them to be gods or not.

    1. Hi jbv,

      Your point that some fiduciaries don't always act in their clients best interests is well taken. However, it's my understanding that when a financial advisor asserts in writing that he is a fiduciary, this declaration carries weight in the courts.

      As for "anyone in this era who isn't behaving like a fiduciary is soon going to be without a job or will never find clients to work with", there may be some truth to this for HNW clients, but in Canada at least, big banks will continue selling expensive closet index funds, and Canadians will keep buying them.