Disagreement With An Icon

I hate disagreeing with people, but in finance, that's more or less the norm at times.

I hate disagreeing with people, but in finance, that's more or less the norm at times. 

Avoiding losses also means avoiding gains. 

Avoiding losses also means avoiding gains. 

Zvi Bodie, who is the Adele Barron Professor of Management at Boston University is one of my favorite authors and speakers. His textbook, "Investments" is renowned around the world and is used in the certification program of the CFA Institute and the Society of Actuaries. 

With all that said, sometimes, even Zvi just gets it dead wrong.   

In a recent BU video titled "Three Crucial Tips" Professor Bodie offers some "salient" advice on matters of personal finance. I take exception to just about all of them, here's the skinny on each

1. Take No Risk

Professor Bodie notes that he hates to lose money more than anything and to that end, he takes virtually no risk with his investments. He further notes that [a] he is much more concerned about loss than he is about gains and [b] taking risk is dependent on how you're going to feel if you lose the money. 

Well, first off, Professor Bodie is a professor of management so we can assume safely I think, that he's probably paid more than most people and being grounded in management, he's  a bit more comfortable confronting his financial issues than most are. To that end, he likely started saving early and often with reasonable deposits. If most people were to operate that way, saving early and often, the need for "risky" investments would naturally diminish over time. After all, once you've accumulated enough to fund your goal, it's funded. Enough said. 

As to concern about losses, behavioral science tells us that there is no difference between professors and the general population, everyone counts losses more than gains. That's why people prefer to buy into the stock market at 12,000 on the Dow (when it's expensive) instead of at 8,300 when it's cheap. Amazingly, we're so scared of losses that we inadvertently wait till they're the most likely to happen in our effort to avoid them. That's part of the problem. If that seems irrationale to you, let's shift the "consumable" from stocks to socks. If you needed to buy a supply of gym socks for your year long workout regime, better to buy them at $3.00 a pair or $1.00 a pair? I thought so. 

2. Trust No One

Professor Bodie contends that "no one knows you better than you know yourself." Again, enough said on that, and simply stating the obvious doesn't, in my way of thinking, present a cogent argument on why to either do or not do something. 

At point of fact, we don't even really know ourselves all that well. If we did, we'd have a better understanding about our goals, vision and dreams for the future and we'd be doing something to make them a reality. 

While it's true that no one knows you better than you know yourself, you can in fact, work with an advisor who will know you almost as well as you know yourself and, who should be able to motivate you to do something to make some progress towards your hopes and dreams. 

The Professor did note that if he had to take his car to be fixed, something he'd trust someone else to do, he'd ask a lot of questions of that person. That's good advice, when people seek out a financial professional to help them, they too, should ask a lot of questions. To the best of my recollection, both the FPA and CFP Board have consumer materials on their website listing questions to ask your advisor. 

3. Get Guarantees and Read Some Books

Oh boy. Really? We're sort of back at square one. There aren't many investments out there that come with guarantees. There aren't any investments out there that come with guarantees that are in and of themselves going to enable you to reach your goals. Remember when Jimmy Carter was president? The yield on 30 year treasury bonds was 14%, unfortunately, the core inflation rate was about 16% which meant you were locking in a guaranteed loss of 2% in purchasing power. Is this the type of guarantee that Professor Bodie had in mind? I think not. 

The good professor also notes that finance isn't that hard and that there are many books out there that can teach you about finance if you'd read them. 

There are as many books out there about weight loss and yet we live in a world of largely large people. Cooking, wine, golf, scores of books producing woefully bad results. If reading about something meant that you'd automatically inculcate what you read into your life and times, what a wonderful world this would be. 

And, yes, personal finance is easy if for no other reason than what ideal life you aspire to has nothing to do with financial matters, since;  [a] your goals financial and otherwise should be based on your wishes, dreams and building a life that makes you happy, [b] you can delegate the complicated part to someone who will make that ideal life the centerpiece of everything you do and each decision you make, and lastly; [c] all you have to do is start and then keep up with it, in concert with a trusted advisor to guide you and help you make interim course adjustments. 

Finance should work like the Apollo mission. JFK said we were going to send a man to the moon and bring him home safely before the decade was out. (Note: This is a GOAL, clearly defined and stated.)

He had the vision about what he wanted and then he turned it over to the people that he trusted to make it happen. 

Then it happened. Enough said. 

Were there not the details of life, were we all blessed with all the understanding and money we needed, personal finance might be easy. 

Steve Jobs was rumored to have told his designers and technicians at Apple to build the best phone the world had ever seen. 

Then he too turned it over to people he trusted to make it happen. 

Here's the the real three topics you must learn; 

  1. Say what you want (set appropriate goals)
  2. Turn it over to someone who will help you make it happen 
  3. Trust the process  

When will you?   

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