Why doesn’t someone tell me what to do with my money?

I am sitting here in my office looking at the titles of the books I have bought and read over the years. Wealth Cycle Investing, Cash Machine and The Truth About Money are titles that catch my eye. There are many, many others.

Why did I buy those books? Because I, like many people looking for a way out of financial quicksand, have often gotten discouraged and wished that someone with more brains than me would give me a plan and tell me what to do.

Stephen Greenspan wrote in a recent Wall Street Journal article about financial gullibility. He was conned by Bernard Madoff. He attributed his gullibility to financial ignorance and his inability to remedy the situation through financial education. He also described the social factors that cause us to act against our own financial interest. Who is Stephen Greenspan anyway? He is professor emeritus of educational psychology at the University of Connecticut. Oops and oh dear. If he gets ripped off with all the tools he has to understand human behavior, what happens to the rest of us? Are we sunk?

I do not think. The truth is that no one, and I mean, no one will care as much about our own personal financial situation as we do. A dear friend of mine used to be an investment banker on Wall Street. He asked me how he was investing my 401K. I said that he was invested in bonds and index funds. She said that was a good thing because co-workers of hers who were money managers spent more time managing their own accounts than their clients’ accounts. Hmm, what a surprise. But isn’t this what the current financial crisis is all about? That money managers, brokers, CEOs, makers of financial instruments were far more concerned with their personal results than the long-term implications of their actions on the market?

What is a person to do? The first thing to realize is that while you may have a trusted financial advisor, that advisor also has mouths to feed and we as a society seem to be a bit beyond the philosophy that pay and compensation should be based on value that one creates in the marketplace. There has been a giant disassociation of the concept of commissions based on the profitability for the investor. Mortgage brokers and real estate agents were paid based on sales and loans generated by overpriced properties. Now that real estate prices are plummeting across the country, they get to keep their money. Fund managers can keep one, two, three, four, five or six percent of assets under management, even in a declining market. As a friend of mine recently said, it’s a “Yo-Yo”: just me. One would do well to realize that it is a “Yo-Yo” and act accordingly.

Financial planners tell individual investors to consolidate debt by refinancing their homes, buy and hold, diversify and invest for the long term. What they forget to tell people is that the long run is actually a generation. Charles Farrell, an adviser at Northstar Investment Advisors in Denver, used data from Morningstar’s Ibbotson and Associates to analyze 52 rolling 30-year periods, beginning with 1926 to 1955 and ending with 1977 to 2006. “But here’s the interesting thing: Most of their wealth would have almost always arrived in the last 10 years, Mr. Farrell calculates that, on average, you would have netted 8% of your final wealth after the first decade and 32% after the second, that is, 68 % of cumulative total amount was amassed in the last 10 years.” (Wall Street Journal, Jonathan Clements November 21, 2007) For the investor who invested in mutual funds in 2000 and wonders when they will finally make money, the answer is probably 2030. Too bad that investor needed that money in 2010, 2015, or 2020.

What about using a home to consolidate debt? Most financial advisors forget to tell their clients that it is beneficial to acquire the skills necessary to eradicate debt in the short term. Swapping short-term debt for long-term debt simply prevents the problem without addressing the underlying problem of short-term debt. Lack of debt management skills simply means that short-term debt will recur if the reasons for the accumulation of that debt are not addressed. From the point of view of financial planners, consolidation solves their clients’ debt problem until the debt reoccurs. To me, the only reason to refinance a home is to free up capital to use for other purposes, including acquiring the skills necessary to retire debt in the short term. Once the debt is retired, the capital can be directed to other worthwhile financial projects.

Why won’t someone tell me what to do?

One of the biggest criticisms of financial author Robert Kiyosaki is that he doesn’t give people a specific blueprint for achieving financial freedom. He writes, outlining general concepts, without providing details. Robert Kiyosaki does not know each individual’s circumstance, level of financial education, or risk tolerance. How can he just tell any individual what to do?

Acting as the bon vivant, I started very late on my financial path and had to make up for lost time. My solution has been to first realize that it is a “Yo-Yo” and read a lot, a lot. Understanding that there is no one size fits all when it comes to financial matters, I am careful about where I get my financial advice. I was listening to a recent Business Week podcast. The discussion was about credit, the credit markets and ways to protect yourself financially during the current recession. The correspondent didn’t even know his credit score when asked. I listened to the podcast, but I certainly wasn’t going to take that correspondent’s advice. I have put together a plan that works for me. My plan is not sexy, it’s slow and steady. It is not a single strategy, but rather a combination of strategies drawn from a few sources. I use free online calculators at bankrate.com and hugh’s calculators to make savings and investment projections. I work diligently on my plan. I make mistakes and wasted opportunities, but my plan works anyway. Yes, I have financial advisors, but the advisors I started with are not the ones I have today. The advisers I have today have realized over time that they care about my interests as well as theirs. I never expect an adviser to jump under the train for my sake, but I do hope that if they see the promised land, they will take me by the hand and we will journey there together.

What are the lessons? First of all, realize that it is an act of “yo-yoing” accordingly and read a lot. Second, financial intelligence is the only remedy for financial ignorance. Third, wealth creation takes time and is not without risk. Fourth, develop a plan and work on that plan. Fifth, evaluate that plan. Sixth, wealth building is a team sport, so develop your advisors and evaluate them based on the results they get for you. Seventh, as Jesus once said, the poor will always be with you, so understand that whatever is happening in your life that prevents you from fulfilling steps one through six will always be with you, so the time to truly begin is now.