Have you ever noticed how catchphrases in Hollywood movies make their way into popular culture? I’ve met people who tell me they find personal finance challenging because there is just too much to know, with too many competing narratives, so I decided to marry something that is allegedly impenetrable (personal finance) with something universal (famous Hollywood lines) to make the concepts more accessible.
We all know that the personal finance industry hasn’t been able to connect with a large swath of ordinary investors. Why? “What we’ve got here is failure to communicate,” as the Captain in Cool Hand Luke said. And this is very true for the industry. Indeed, this is a conundrum that has evaded any kind of resolution. Which brings us to astronaut Jim Lovell in Apollo 13. “Houston, we have a problem.”
That’s frustrating for people like me who have spent their lives trying to help these same investors and it makes me feel sort of like Howard Beale in Network. “I’m as mad as hell, and I’m not going to take this any more!”
Simply put, getting people to build portfolios that are suited to their psychological temperament and financial situation shouldn’t be this hard. Obviously, some degree of context and customization is required but then there is always an element of chance. “Mama always said life was like a box of chocolates. You never know what you’re gonna get,” as Forrest Gump said in the film of the same name.
All that’s needed for basic portfolio construction and retirement planning is to set a reasonable mix between stocks and bonds, use diversified, low-cost vehicles to build your portfolio, and then rebalance that portfolio with regular contributions and occasional tweaks. But the finance industry would have people believe that the situation is more complex than it really is. “Fasten your seatbelts. It’s going to be a bumpy night.” But despite what Margo Channing said in the classic All About Eve, it doesn’t have to be this way.
To hear the industry tell it, portfolio management is largely about stock picking, fund picking, market timing and regular trading. In reality, these pursuits add very little value for investors, but go a long way to maximizing industry profits. Sad but true. Alas, Colonel Nathan R. Jessup got it right in A Few Good Men when he said: “You can’t handle the truth!”
The personal finance industry has a macho attitude that perpetually shifts people’s attention to make them feel bullish. I call this “bullshift,” which is the title of my latest book. Incidentally, the subtitle: “How Optimism Bias Threatens Your Finances” could double both as a tidy plot summary and industry challenge.
As far as the finance industry is concerned, the idea is to make people feel bullish about both active management and future long-term returns. Despite this, the overwhelming weight of evidence suggests that these pursuits, spurred on by an optimistic, don’t-worry, be-happy attitude, causes returns to fall short of otherwise achievable goals. Investors might shout “Show me the money!” as football player Rod Tidwell did to his agent in Jerry Maguire, as they demand high returns with modest risk – as if that combination was reasonable.
The challenge in calling out an industry that has long depended on this presumptive, yet discredited, value proposition of strong returns with only modest risk is that it poses a distinct career risk for advisers who challenge it. The ethos is pervasive. Evidence-based advisers have been in the minority and have worked decidedly outside the mainstream. Despite this, they continue to fight the good fight in the hope that their message will one day be heard, rather than toe the line in exchange for large financial rewards, like ex-pugilist Terry Malloy in On the Waterfront when he tells his older brother: “I coulda been a contender.”
Hopeful change agent advisers rely on the media to offer a counternarrative to the pervasive industry bullshift. Wishful thinking? Maybe. But no matter how bad things are, advisers tell their clients that things will get better. Like Hollywood legend Vivian Leigh as Scarlett O’Hara said in the last line of Gone with the Wind: “After all, tomorrow is another day!”
We can only pray that their struggle is righteous and will ultimately carry the day when the universe unfolds as it should. May the Force be with you.
John De Goey is a portfolio manager with Designed Securities Ltd. (DSL). DSL does not guarantee the accuracy or completeness of the information contained herein, nor does DSL assume any liability for any loss that may result from the reliance by any person upon any such information or opinions. He is also the author of Bullshift – How Optimism Bias Threatens Your Finances.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.