Thursday, July 15, 2010

Don't be a Poor Boy

"I am just a poor boy though my story's seldom told. I have squandered my resistance for a pocket full of mumbles, such are promises. All lies and jest. Still a man hears what he wants to hear and disregards the rest."
- The Boxer, Simon and Garfunkel

Imagine for a moment that a stranger approaches you. He informs you that he has found a magic potion that will keep you forever young, instill unlimited virility, regrow your hair, and generally improve your quality of life by leaps and bounds. He is willing to sell you this amazing drink for a paltry sum of $10,000. On the one hand, anything that could confer those gifts would be a bargain at $10,000. Most people would be willing to pay a lot more than that for something as wonderful as eternal youth. On the other hand, you weren't born yesterday. Unless you are one of those people who responds regularly to spam from Nigeria promising millions of dollars, you have a well honed BS detector that reminds you that the gifts that this man is promising will not materialize.

However, if you were to replace the fountain of youth with a guaranteed 10% annual return on your money, and the man was Bernie Madoff, and this was ten years ago before Bernie was thrown in jail, you might have given him a lot more than $10,000. For over a decade, Madoff convinced thousands of people to give him millions of dollars based upon an investment scheme that was as equally unlikely as the aforementioned magic potion. Why did it work? It's because when it comes to money, most people do not have the ability to separate truth from fiction.

People often rely upon weak impressions, emotions, and wishful thinking to guide their financial life. They hand over the reigns to so-called experts to do the thinking for them. Now most financial advisers are honest, hard working people. Some of them might even know what they are talking about. However, there are a few like Madoff who do not have your best interests at heart. They depend upon people's emotions and their lack of a BS detector to perpetrate their scams.

That's not to say that you should not use a financial professional. They can be trusted advisers and a good source of information and ideas. However, at the end of the day, you should go into the relationship with your eyes wide opened. Do not accept what he or she has to say at face value. How do you do that? You need to educate yourself so that your BS detector can identify if the person knows what they are talking about, if they do not have a clue, or if they are looking to scam you. Are they telling you something that is in their best interest, or are just trying to sell you a pocket full of mumbles?

When you have the facts and figures at your disposal, you won't need to use impressions and emotion to make decisions about your financial life.

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