How misinformation and fear are a recipe for poor financial decisions.
The 1980s movie, “The God’s Must Be Crazy,” tells the story of an African bushman of the Kalahari who happens upon an object that’s fallen from the sky. Confused as to its origin and purpose, he brings it to his village where the people are quickly fascinated by the newfound artifact. Various attempts are made to identify a use for it, ranging from making music to tanning snake skins.
The villagers’ fascination turns to covetousness and dispute, leading the bushman to journey to a cliff where he “returns it to the Gods.” What was the mysterious object? It was a glass coke bottle a pilot had tossed from his side window while flying overhead.
The adage “we fear what we do not understand” applies to many areas, not the least of which are financial instruments like the stock market. Recently I met with a prospective new client who opined, “isn’t investing in the stock market just another form of legalized gambling?” I’ve heard this many times before, and if it’s not a skepticism toward the market, it’s skepticism toward some other financial tool like whole life insurance or an annuity. Like a glass bottle to a primitive tribesman, financial instruments in the hands of the uninformed are too often mishandled, resulting in unwise decisions.
The short answer to the stock market gambling question is no, not really. In fact, at a basic level public stock ownership is very similar to ownership in any other type of business. Like gambling, business ownership does have an inherent risk of loss, but there is a big difference between gambling at the casino and owning the casino! Yet this type of misunderstanding is common among people I’ve met with over the years, and, unfortunately, often leads to unwise decisions concerning their finances.
Headlines, radio talk show hosts, and next-door neighbors are sources of misinformation and overgeneralization that often paint certain financial tools in a bad light. As a result, financial decisions are made in fear or can become financial indecisions. Consider these common sentiments toward various financial tools: cash accounts won’t grow; life insurance is a bad investment; annuities are a rip off; stock options are too risky; bonds are too conservative.
Can I help put your mind at ease for a moment? It is okay if you don’t fully understand how all of these work. Furthermore, it is okay for you to be uncertain which ones are right or wrong for your specific situation. But it’s not okay to allow that lack of knowledge to paralyze your decision-making. Rather than avoiding what you don’t understand, seek both educational resources and good advice from a professional who has your best interest at heart.
Fortunately, despite all of the bad information and generalizations out there, a lot of good and helpful resources are readily available as well. Ask the internet your questions and bring it your doubts. Investopedia is one such resource where you can find
educational pieces on a host of financial topics. Morningstar is another great site, particularly for more technical expertise. Of course, use caution with anything you read on the internet, and remember that everyone has an agenda.
Another excellent resource is a competent, trustworthy financial planner. Competent professionals remain the most expedient way for people to receive insight and guidance. For example, articles and resources abound to answer your health questions, but nothing can beat the advice of a good doctor who knows you and can filter all of that info into constructive guidance that will navigate you down your best health path.
Likewise, a competent financial planner (or advisor) will get to know all he or she can about your situation – past good decisions and bad, dreams and goals for the future, tolerance for risk and security, and more. A good planner will champion education, ensuring you’re well-informed and literate with respect to manifold financial instruments. Like a doctor, partnering with a good planner is well worth the money spent for the advice received. (For a guide on what constitutes a competent planner and how to find one, Investopedia has a great article!)
Fear and uncertainty can be devastating. The book of Proverbs says “The heart of him who has understanding seeks knowledge, but the mouths of fools feed on folly” (Prov. 15:13 ESV) and in another place, “listen to advice and accept instruction that you may gain wisdom in the future” (Prov 19:20 ESV). With regard to making financial decisions, failing to learn and seek advice may be the greatest gamble of all.