Sometimes the highest risk to your finances can come from legitimate companies with less than perfect intentions. In the 19th century it was common for travelling salesmen to come to town in a wagon promoting special elixirs that purportedly would heal “all that ails you.” One of the most common elixirs was made from snake oil. Snake oil has been used in Chinese medicine for centuries as a topical skin treatment with some benefits for healing minor pain. The problem with snake oil was that those who sold it in early America often claimed benefits far beyond its normal use. Consequently, the term “snake oil salesman” remains to this day as a description of someone who sells a product whose use and benefit is greatly exaggerated. Because these products may have some limited positive benefits, they can be a risk to consumers who are led to believe they can do much more.
I have a friend who believes in one such thing, and anytime someone has a sickness of any kind, he gives assurance that his magical product will cure it. You could have something as simple as a cold or as deadly as cancer, or maybe you just have a food allergy. It doesn’t matter what it is, he will insist that his product will cure it. His product does in fact have some value for certain things, but the transferring of that value to “all that ails you” is what makes it dangerous. In our enlightened age it is foolish to believe any single product can cure all diseases, or even many of them. We would never accept an auto mechanic who claimed the same procedure would fix any problem with our car.
Snake oil salesmen also exist in the financial world. They travel around with their show, and their well-polished pitch, complete with pictures, graphs and testimonials, portraying their products as the solution to all problems. Some are well-meaning but their single product focus should be an immediate warning flag to potential investors. Their products may have good value if used properly and in the right situation, but all too often they are sold too broadly with implied claims that such financial solutions will “cure all that ails you.”
I have yet to find a financial product that solves all problems or that is appropriate for all people. Just as we have numerous medical treatments for the various human ailments, there are numerous financial solutions as well. If my doctor prescribed the same cure every time I visited him, I would find another doctor. Despite its current negative connotation, in the 19th century there was nothing inherently wrong with snake oil. The problem was with its promoters who greatly exaggerated its potential benefits to the unsuspecting public. In your search for financial solutions always remember that each product has its use and an otherwise good product can have negative consequences if used in the wrong situation.
One of my biggest sacrifices when I became a pilot was accepting that I would be committing to routine medical exams for the rest of my life. I was never a fan of going to the doctor unless I was bleeding uncontrollably or a bone was sticking out somewhere. I didn’t see the value in a “well” check-up.
Most pilots have a stressful relationship with the FAA over pilot medicals, given the strict requirements and the seemingly simple conditions for which a pilot can be grounded. The FAA’s position is that the public’s right to have a healthy pilot takes priority over a pilots right to fly, and even my wife would agree with that position. Statistically, only a very small percentage of airplane accidents result from pilot health conditions, so the system is apparently working.
A financial advisor in many ways is much like a doctor. When there is economic sickness going around as it was in 2008, people flood our offices and ring our phones looking for answers. They are happy to have someone look over their investments and help them in their time of dire need. Then when the economy improves, other matters begin to take priority. Getting a checkup from the financial advisor doesn’t seem so be so pressing when everything is going well.
The problem with going to see the doctor only when you are sick is that in many cases, a little pre-emptive action might have prevented or lessened the effects of a disease. Catching things early is almost always cheaper and easier for everyone involved. Routine pilot medicals are largely designed to catch potential problems at a time when they can be more easily addressed, rather than in the cockpit at 30,000 feet. In the same manner, a routine financial checkup is more valuable when performed before a disaster hits. In this way, potential problems in the portfolio, or weaknesses, may be diagnosed and treated when it is easier and likely cheaper.
Like most pilots, I love to complain about the frequent medical checkups. I take the attitude that am healthy and if I ever stop being healthy I will call my doctor and let him know. But I recognize that the FAA has learned from experience that the best protection for the flying public is to be proactive and preemptive when it comes to pilot health.
The economy has been mostly healthy for about nine years now. It is an easy time to feel like there are a lot more pressing things in life than having your investments reviewed. Fortunately for airline passengers, the pilot up front is forced by law to regularly demonstrate they are in good health. Unfortunately for many individuals there is no such requirement when it comes to their financial health, leaving many potentially exposed to underlying problems.
During times of great economic growth like right now it can be difficult to feel the need for a financial checkup, but it may be the most intelligent time to be getting one.
When our family lived by the river in Santa Clara, Utah we were in a continual battle with wolf spiders and cockroaches. Both are harmless but also creepy when you come across them in the middle of the night. Cockroaches are easy to kill with proper treatment but impossible to completely eradicate. Spraying for spiders is largely ineffective but fortunately spiders are cannibalistic so they do a good job of maintaining their own population. We usually found just one per room and if we killed it, another would take its place.
In our current home we have a new pest to deal with; scorpions. Initially this was almost a deal breaker. Most people are terrified of scorpions, but in time we came to gain an appreciation for the scorpions we share our property with. Being in the spider family, they too are cannibalistic so they assist us in keeping their own numbers down, but what we learned to appreciate about scorpions is they also eat everything else. In the six years in our current home we have never seen a spider, a cockroach, or even a cricket. We are active in our efforts to control our scorpion population, and they are active in controlling everything else. Launa now says she would gladly take a few scorpions over all the other pests.
We also have a vacation home in southern California. With the wet climate near the beach at that home, we are in constant battle with termites. The thought of termites brings fear to most desert dwellers, but termites love the moist beach air as much as we do and any homeowner within a few miles of the beach shares their property with those hungry little guys. Though we were upset at first, termites quickly became just another pest that you get accustomed to and learn to deal with.
Most people are constantly in search of the perfect living environment just as they are in search of the perfect investment portfolio. But neither exists. Every solution has its own “pests” to deal with. Those who are determined to find perfection in life are not only constantly frustrated, but even worse, they often fall victim to unscrupulous salespeople who purport to offer it.
We enjoyed our life in Santa Clara even though we dealt with cockroaches and spiders. When we visit the beach we spray those pestiferous termites, then soak in the beautiful ocean air. We love our spider and cockroach free present home, but always remember to wear shoes while walking around the house at night.
The great secret I have learned from the various pests I have dealt with as a homeowner is to not let them define the joy I have obtained from each place I have lived. Your investments will not always perform as you want them to, and none of them will ever be perfect, but if they provide you a good lifestyle be grateful for it, and don’t let your obsession with the occasional pests ruin the experience.
My family loves theme parks. We have learned to travel prepared so we have a special backpack that I carry, that has within several items that might be useful throughout the day. I have rain ponchos, sun screen, spare phone batteries, chapstick, sweatshirts, socks, bandages and Tylenol. You never know which of the above you might need, but you can be certain that eventually you will need them all.
In financial terms, we would call the items in my theme park backpack “uncorrelated,” meaning they would be useful under different circumstances from the others. For example, it is not likely that I will need both sunscreen and rain gear on the same day. I also rarely need sweatshirts in sunny California. Some days I try to convince Launa that there is no chance of rain so maybe just this once we should leave the heavy ponchos and sweatshirts behind. As always, her better wisdom prevails and I carry my load dutifully.
When people assemble an investment portfolio, they are really just creating a financial backpack. They put in it things they believe they will need in order to achieve success. It is natural to want to include investments that always make money, all of the time. If an otherwise valuable item, like a rain poncho, doesn’t fit the financial forecast for a sunny day, they have a tendency to want to leave it out. Though I can totally relate to not wanting to carry a poncho on a sunny day, I have learned the value of having it with me. When the rain does come, I am always thankful for the many sunny days when I carried that poncho.
So how do you know if your portfolio is prepared for the rain? How do you know if it is dangerously overly correlated? The hard answer is, if everything in your portfolio is making good money for you right now, then you very likely have a highly correlated portfolio. This means that all your investments respond in a similar fashion to the same conditions, and you may be at risk if the financial weather changes. It may be counterintuitive to think that having things in your portfolio that are not doing well today could actually be good, but it is the same principle as carrying a sweatshirt in your pack on a sunny day.
On one beautiful sunny day Launa and I were enjoying our walk in a crowded theme park when an unexpected cold front came through. As the crowds scurried for the exits we donned our sweatshirts and ponchos and continued to enjoy a much less crowded, beautiful walk.
There is great value in having uncorrelated items in your financial backpack. There is wisdom in taking advantage of the sun while carrying the extra weight of a sweatshirt and rain poncho just in case. Take it from a theme park expert. You will absolutely experience both rain and sun in your investing life. Make sure you are always prepared for both.
I have been blessed this week as I took some time with Launa and our daughter Jaimee, who is my illustrator, to do book readings at local elementary schools. We wanted to share the special message of my new book, but after each reading we found that we were the ones being educated.
I began an effort a few years ago to teach and write books for young people under my pen name Ule B. Wise, that would help prepare them for the financial challenges of life. Rather than writing about money specifically, I wanted to teach values and character traits that naturally lead to success in other areas of life. As an example, a child will be much better at budgeting money if they first learn patience.
The basis of this book’s story is a boy who climbs a tree in search of a gold egg that he was told lies in the nest at the top. His friends are not supportive, the climb is difficult, and he has some failures along the way, but he persists until finally reaching his goal. What he finds at the top is greater than he ever hoped for.
I always ask the kids what they learned from the story. What I did not anticipate, but what has become quite obvious after several book readings, is how absolutely brilliant these kids are. Rather than needing coaxing to find the right answers, these young children gave responses that, in many cases, exceeded those from my adult classes. This week a 10-year-old girl responded, “The boy learned that the real reward was not the gold egg he was seeking but the lessons he learned while making the difficult climb.” Wow! An 8-year-old answered, “The message is to experience the journey of life and see the beauty along the way.” Double Wow! And a first grader said, “You can’t really enjoy a reward unless you work for it.” I went into this project thinking we had so much to teach our children. However, I am learning that we have much we can learn from them.
Financial problems are the root cause of many personal, family and national disasters. Irresponsible spending threatens the very future of our nation. If we can raise a generation that is wise with money, we can eliminate a great deal of sorrow. After just the last two months reading to these elementary students, I am convinced that this is a winnable battle. These kids are brilliant. They have within them what it takes to succeed. They are ready and willing to learn.
My Dad, who inspired me to write children’s books, told me to never teach down to a child, to always teach up. When you teach financial or other principles to children, expect greatness from them. Stretch their abilities, challenge their minds, then step back and watch in amazement at what this generation will accomplish. Thank you Sunset, Coral Cliffs, Little Valley and Crimson View Elementary for inspiring me, and giving me hope for our future – for your future.
In a report this week on public school financial education, my home state of Utah was the only state to get an A+. We’ve come a long way since the 90’s when several states began to mandate financial education in their public school system. I applaud these efforts, having seen first-hand the ruin that can come to families and individuals who do not manage money well.
One of the most popular financial educational activities offered the youth are the investing contests where the students are given $100,000 on paper to invest, and have a month or two to see who can grow it the most. These contests get the kids excited about investing, teach how to value a stock and predict its growth rate, and generate a desire to keep learning. These events have value and I support their use, but with a word of caution. The ability to make the most money in the stock market over a few weeks of time will earn a student bragging rights, but it has little to do with being a successful investor.
These high school investing competitions leave out one of the most important factors in investing – emotions. When your own money is on the line, the ups and downs of the markets take on a whole new dimension, and the education becomes powerful and lasting. A great mentor of mine used to joke that the greatest investing lessons come when people lose their own money.
If you really want to expand your kids’ financial education, help them take the basics learned in school and in investing competitions, and apply them to a real life situation. I recommend parents and grandparents assist youth in setting up a real investment account. Encourage them to contribute to it regularly from their own funds. Use a financial advisor and bring the child with you each time you meet with them. Let them see first-hand how it all works. Most importantly, review their statements with them. Grandparents often open accounts for their posterity but fail to involve the kids in the process. I have found great value in showing my own kids how the account’s value goes up, and sometimes down, over time. They learn patience and discipline and to appreciate the long term nature of investing.
I love to point out to my kids how much their account has made during a period of time, or how many dividends they earned without any extra effort on their part. There is no replacement for watching the magic of compound interest as it works with your own money. The process of letting your money work for you can become addicting, in a good way.
Classes and contests are a great first step to learning about investing, but nothing beats the real thing with real money. Let your kids learn while they are young so they will carry those lessons forward to when it really matters.
While flying home from Salt Lake City yesterday a fellow pilot taught me a valuable lesson in investing. First of all, it’s important to understand that airplanes do not typically fly in a straight line. There are roadways in the sky to facilitate the organized flow of traffic. But like most of us, pilots love to take shortcuts and often request them. On this flight a commercial pilot asked for, and received a shortcut on his route, for which he expressed gratitude. Curious about the real effect, I took out my map and pencil and realized the shortcut given would save the pilot about 1 minute of flight time.
My first thought was the pointlessness of the request, but then I decided to do a bit more calculating. The regional jet at issue has an hourly operating cost of about $4000. That means every minute in the air costs the company $66. If that jet flies between Salt Lake City and my home airport of St. George four times a day and the pilot is granted a one minute shortcut on each leg it would save the company $264 per day. Over the course of a year that single regional jet would save nearly $100,000 in operating costs. I decided that rather than think it a silly request, I should contact the airline and suggest they put a nice bonus in that pilot’s paycheck.
In all areas of endeavor, it is the big things that get the most attention but usually the little things that make the most difference. In my investing years I have occasionally bought a stock, or a piece of real estate and made a great profit on it. These are the kind of things all investors love to brag about. But when I look at the whole of my financial picture I realize that most of my personal wealth has come from the little things I have done every day throughout my life. The regular payroll deductions into savings accounts, the faithful adding of a little extra principle to each mortgage payment, even the family rule that we only order water in restaurants, are all small actions, little shortcuts you might say, that individually mean very little but collectively have had a significant impact. The big wins are fun to talk about, but the little things really deserve the credit.
I have worked with thousands of successful investors and there are certainly those few who made it big in a single action. The vast majority however have learned, like myself and my fellow pilot, that it is the small and seemingly little things that we do everyday that are most likely to lead to a successful financial finish to our life. Each of us will have our big wins, and likely our share of failures, but life ultimately rewards those who do the “right” little things over and over again; Even though to others they may seem so insignificant.
My dad was an orphan and spent his youth in the St. Francis home for boys in Detroit. The home was a safety net for boys, but it was far from an ideal upbringing. The trials, loneliness and sometimes abuses of that home left indelible marks on his life and taught lessons he worked tirelessly to teach his children.
When I left for the university my dad encouraged me to study history and philosophy. He said that philosophy would teach me how to think, and history would teach me what I should be thinking about. I followed that advice and one day in philosophy class my professor asked us to come up with a single phrase that could be applied to every aspect of our lives. The following week I turned in my assignment with this phrase, “Everything has its price.”
My dad taught that every decision had a price and that every action required giving up something else. In investing we call that “Opportunity cost,” meaning when you spend $10 on a meal you have given up whatever else that $10 might have done for you. The price of the meal is the loss of the $10 while the price of not buying the meal may be hunger. It is our choice which price we pay.
When people retire they bring with them the evidences of the various prices they have paid throughout their lives. Some have paid the price of sacrifice, having faithfully put off current wants for a better future. Others, for whatever reasons, decided they could not “afford” to set aside money in their youth, or they did not have the discipline to do so. They failed to pay the price to assure their financial future, and so in their old age they are paying a different price. Young people often mistakenly think that financial planning is optional. Barring a personal disaster, your future will absolutely come. The question is, do you want to plan for it or do you want to let life plan it for you? In either case there will be a price to pay.
History shows a strong tendency for people to seek returns without paying the full price. Our national obsession with gambling is clear evidence of this. Politically we continue to run up massive deficits, giving further evidence of our thirst to obtain benefits we aren’t willing to pay for. Even intelligent and successful investors are not immune to this human tendency.
We must be ever on our guard against the temptation to try and obtain something we haven’t fully paid for. It is one reason even successful individuals can make bad investments decisions or even worse, get sucked into fraudulent schemes. Always remember that everything in life has a price. If you are tempted to try and bypass the price, or take a short cut, be aware that some other price for your decision awaits down the road and you may find it is more than you want to pay.
A couple years ago the Department of Labor issued the Fiduciary ruling. The purpose of the ruling was simple; to require financial advisors to act in best interest of their clients. Unfortunately, the politics involved took a reasonable idea and created a confusing policy that is still tied up in the courts.
I support regulations that protect investors but I also recognize we must each take responsibility for our own financial safety as no level of regulation can stop all fraud. Here are just a few ideas I shared at a recent fraud seminar to assist in the effort to protect your money.
Understand that white collar criminals are called wolves in sheep’s clothing for a reason. They try very hard to look like one of the sheep as they blend in with the flock. They join clubs, service organizations and even church groups to gain credibility with other members. Do not trust someone just because they belong to a group whose members are generally trustworthy.
Investigate claims of credibility. Criminals may use impressive titles or official looking designations to create the appearance of importance. Not all titles and designations are the same and many have little or no value. Do some research to find out what a designation means and the qualifications to obtain it. Also make sure the person is actually an expert in the particular field in which you are investing. ie., I respect my CPA as my tax expert but I wouldn’t go to him for foot surgery.
Be careful of strangers bearing gifts. Timeshare salesmen skillfully use the law of reciprocity to make prospects feel obligated to buy their product. It’s ok to take a free meal or small gift from someone in exchange for listening to their pitch, but never let that make you feel obligated to buy anything.
Avoid the pressure of scarcity. Being made to believe that you have somehow been singled out for a special opportunity, or that an investment may not last long, is a definite red flag. If you don’t have time to do your proper research, then just say “no.” It is better to miss a few good ships if it means protecting you from boarding the Titanic in a last minute rush.
Finally, never become a gold-rusher. If you are being told that everyone else is making money on an investment except for you, slow down and do your own homework. Never invest just because someone else did or because others are seemingly making money without you. Make each investment decision based on its suitability to your unique situation. As with most gold rushes, when it’s over far more money is usually made by the guys selling the shovels.
Hopefully, as the Fiduciary rule gets sorted out, some solid investor protections will come from it. Remember however that no one, not even Washington, cares more about your money than you do and therefore you must be your own first line of defense in the battle against fraud.
I have been concerned about the messages being delivered to the youth of the rising generations. Many young people live in a “virtual” world, a world of fake reality. It is a world where there are no losers because everyone gets a trophy, and where self-worth is determined by social media “likes” and “shares.” It is a protective world that in many ways does not require enough of its youth and sadly, a world that has very little resemblance to the adult one that awaits them.
I grew up in a much different world. I ran my first lemonade stand with my brother at age six and have had a job ever since. I learned lessons of life by living life, and those lessons were sometimes painful. In High School I was very small (only 5’1” and 85 lbs. on my first driver’s license) which meant gym day held the time honored tradition of shoving the little guy in the locker. Bullying back then was common and in P.E., almost encouraged. (I still harbor negative feelings towards anyone whose name starts with “Coach.”) Though I support anti-bulling efforts today, I still learned a great deal from those trials. I learned that I wanted to go to college and be very successful so bullies couldn’t push me around anymore. It’s seems a bit odd that the older generation credits the “hard knocks” of life with teaching them many valuable lessons, yet sometimes goes to great lengths to protect their kids from the same.
When my Little League team lost the championship game in a heart-breaker, we cried a bit while watching the winners get the only trophy, then went back to the ball field the next day and practiced all the harder. Yes, failure was painful, but it was often our best teacher. I didn’t receive nearly as many trophies as my kids, but mine sure meant a lot to me.
I recently released my first children’s book (under my pen name Ule B. Wise) and a client asked why I was writing books for children. I responded that in my years of teaching thousands of individuals about investing I have come to a stark reality. The people best prepared for retirement, the ones who live the most financially sound lives, are usually the ones who have done so all along. For the most part being financially wise is a lifelong habit formed in the early years. So I decided I needed to start the education, not with 50 year olds, but with five and ten year olds. I also decided to begin, not with financial concepts, but with teaching some of the basic values of life such as discipline, determination, courage, patience and other qualities that if learned, have the potential to benefit all areas of their lives. If they can learn these principles, then showing them how to save and invest and manage money will be so much easier. Then, if they like, they can go out and buy their own trophies.
Hi, I'm Dan. I'm a CFP® Professional.
Securities and advisory services offered through Commonwealth Financial Network®.
Member www.finra.org / www.sipc.org , a Registered Investment Advisor. Wyson Financial, 375 E Riverside Dr, St. George, UT 84790
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