As in rubber-meets-the-road, stuff's-gonna-hit-the-fan cynicism? As in every last bit of personal finance advice you've learned reading this blog, reading other blogs, reading financial magazines, and listening to your grandmother has gone out the window? As in:
- Your dollars become worthless. The dollar purchases only 4% of what it did in 1913. I don't see it getting any more valuable.
- Your diversified index fund tanks. Mine did. It hasn't recovered. I don't know when I'll see it recover. It isn't obliged to recover, after all …
- Your home value plummets. House prices don't always go up. They go down — way down sometimes.
- Your land gets confiscated. Only for the public good? Well, it's all right for private developers to take it through the help of accommodating local governments, too, for mostly non-public economic development and increased tax revenues.
- Your assets become illegal to accumulate for personal investment purposes. That's what happened to gold in 1933.
- Your retirement benefits go away. Nothing says that your pensions, or Social Security for that matter, are owed to you. They are just promises to pay you.
- You are in a higher tax bracket in retirement? Tax rates go down, but they also go up. I tend to think they'll go up for me.
- You lose your job in a depression that makes the 1930s look like a bad hair day? We as a country have financed our prosperity rather than grown and produced for it. That can't last forever.
- Oil becomes so expensive and scarce that the lines of the 1970s will look like an express lane? Unless there really is a creamy, oil-filled core that will last us another 2,000 years, we're running out. In that case, there's probably a Santa Claus, too.
- Your individual retirement savings are earmarked to supplement Social Security entitlements? Preposterous? Are you 100% sure that this won't happen? Maxing out that 401(k) maybe only one of several viable alternatives?
Now, by listing these possibilities I'm not telling you to do one thing or another. If this is the first time that you've thought of some of these possibilities, I'm glad you read the post. These possibilities hit at the heart of traditional financial security in this country, which is much more optimistic:
- “This note is legal tender for all debts, public and private.”
- “Invest in a diversified index fund regularly to take advantage of dollar-cost averaging.”
- “Your home is your biggest investment.”
- “This land is your land, this land is my land.”
- “Good as gold.”
- “I'm safe working for a big company.” Or, “I'm safe working for the government.”
- “Invest in your IRA, let the earnings compound tax-deferred, and withdraw them when you're in a lower tax bracket.”
- “A car in every garage.”
- “I'm investing for my retirement.”
Possibilities are often good things. They can also be terrifying things. But they are possibilities, nonetheless.
I admit that one thing I haven't done an awful lot of until recently is think about where I'm going and how I can get there. I know it's possible to go through a lot of your life — even through college and graduate school — without thinking an awful lot. What's really dangerous about this is that you can be absolutely sure that someone else is thinking, and that they will use you to their advantage if you let them. This goes for employers, employees, contractors, professors, spouses (not mine, though!), children, friends, enemies, customers, businesspeople, investment advisors, and politicians.
This is a cynical way of looking at financial planning. But most folks don't get business, don't get the contract, don't get married, don't get their way, and don't get re-elected by harping on the negative. They tell you positive things until the cows come home. More directly, they can, and do, tell you what you want to hear.
What you want to hear makes you feel good, but it usually isn't in your best interest. What you need to hear, on the other hand, usually is. Then, having heard what you need to hear, you're in a position to think about what to do about the possibility.
Some people will tell you what you need to hear, and they are diamonds in the rough. But since these diamonds can be hard to find, a more expedient way to reach the same end is to seek out opinions that differ from your own and differ from what you're used to thinking. This will help in asking the questions that separate what you want to hear from what you need to hear.
So, with investment advice, I invite you to question it. Is there anything in it for the guys offering the advice? If so, would using their advice do you more good than harm? Or is the advice just wrong?
Thoughts on this post? Let me have it!
All I can say is read Atlas Shrugged and think like Ayn Rand….
My variation on this is something I've thought about quite a bit:
IRS: "You know how you invested in a Roth IRA thinking it would be tax-free at withdrawal? Well, we changed our minds."
I'm quite serious. I think it's absurd to think that tax rates will stay as low as they are now or go lower. The tax laws could be changed radically by the time I retire (~30 years).
If I've spent my entire working career saving like crazy and at the end there's a wealth shift to my peers who right now are maxing out a $50K HELOC or buying a 500K first home, I'll be pissed like nobody's business.
i feel like i've had this conversation with you before… anything can happen but the only benefit anyone gains by claiming the sky is falling is if it does, then they can say "i told you so" and be content in their awesomeness. the only thing everyone fails to realize is that if the sky doesn't fall, you will still claim it can. if the fall does fall, you STILL have no recourse. either way, you're bitter for bitter sake and that really has no purpose. (the you is a general pronoun, not you MBH or you K-man or whoever)
Thanks for the post – I think about these things quite a bit! I tried reassuring myself by reading history – but anything with a span of more than a hundred years or so, and with more than just a single nation focus, turns out to validate these fears rather than alieve them.
Although it hasn't made me stop maxing out my Roth IRA or paying my mortgage, it has made me more careful to diversify more than I otherwise would have… partly in the sense of real estate as well as stocks as well as broad foreign investments, etc, and partly in the sense of "how confidant am I that if were to lose everything I've currently saved, and find myself in an ecconomy that's rapidly shifting, would I have generalizeable enough skills to make myself anew? And look out for a family while I do so?"
Again, I don't tend to alter my life dramatically as a result of these thoughts – I don't have a gun filled bomb shelter under my house or anything – but the idea of living somewhere that would have reasonable access to both food and society should, say, peak oil scenarios turn out to be real and immediate… and having a decent understanding of real medicine without major hospital equipment (I work in medicine, so this is within the scope of my professional life already)… these things do affect my life decisions in subtle ways.
Holy moly, I've been thinking about this a LOT lately. Of course I still follow through with my planning and budgeting and all, but as Rebecca says, I tend to find myself understanding that to some degree it may never matter how hard I scrimped and saved and toiled: we're just a catastrophic event away from having to start over so, how flexible and resourceful can I be?
There are people who can end up broke and rebuilding assets more than once, but I don't think I'm one of them. Not yet, anyway.
Certainly, Jim, the sky may never fall, but then again, in some ways it might. It's not so farfetched to me at all. My parents had to leave everything they knew behind to start all over with nothing in their pockets. That was just 30 years ago.
Ironically, I find that these thoughts push me to relax a little and live life a little more than I'm normally inclined to because maybe I'm saving for an idealistic someday that can never be.
Every time I put money into our Roths I imagine they'll repeal the tax-free-ness of it or give me a refund on the taxes I paid in 2005 or 2006 in order to tax me upon withdrawal. It seems like the people who try to do the astute things (like save for retirement, plan for disasters, wait until they can afford children, etc) get forced to subsidize the fracking morons who didn't.
Something you didn't mention above but I've also thought about: If we ever win the lottery, we'll have insurance coming out the wazoo before we even contact the gaming commission. In fact, if we ever become reasonably wealthy it'll be the same story. My hard work, good luck, or whatever doesn't need to go directly into the pockets of people like John Edwards.
I think your points are good examples of why considering your investment timeframe is so important.
If things do go south and you need the money in the near future you could be in trouble. If you have a 40 year time frame then you should have time to recover from a financial meltdown.
It might even be a buying opportunity. Who said "When there's blood in the streets, buy property"?
Thanks for all the comments.
I don't think that some of the worst worries will come too suddenly. There will be a fair amount of warning, as in there will be more restrictions on tax-advantaged accounts, or corporations will offer broad buyout packages, or gasoline will hit $4 a gallon.
It's not going to happen overnight, so if the sky is falling, it's falling slowly, and there's time to go to the umbrella store and time to store food for the winter. Forewarned is forearmed! 😉
For me, this is a sort of "Pascal's Wager". The upside from assuming that these _won't_ happen are far greater than the upside from assuming that they will. After all, if you're a pure cynic, the most rational strategy is to be a pure hedonist, living large, running up as much debt as you can get away with, and then let the debt disappear when civilization collapses. In the early 1980s, when everyone thought The Big One would destroy civilization soon, there were people who actually acted on this. When civilization didn't end, they had to visit their local BK lawyer…
As for more practical issues, I think the most likely "cynical" scenario is actually one that could help immensely, but will hurt "planners": a change from an income tax to a consumption tax. This will really hoze Roth IRAs since you'll be effectively double-taxed.
As for "peak oil", "global warming", this&that worry about monstrous financial disasters, and the zillions of other talk-show calamities, I prefer to ignore them. Malthus and his heirs have an awful track record.
Foobarista, thanks for your comments!
I'm not sure how Malthus has a bad track record. If you're referring to the Principle of Population, perhaps we've beaten the subsistence curve for so long, mainly through great advances in technology, that it's assumed that it will continue. Perhaps the real checks on population growth have yet to be realized. Peak oil could do this.
To moneysmartlife, I think it was Baron de Rothschild who said: “When there’s blood in the streets, buy property.”
But who said, "It isn't timing the market, it's your time in the market…" refering to building wealth thru real estate.
I agree you need to have a long term perspective. Not necessarily 40 years, but at the very least 5-20.
I think it is important to diversify too. What do you think? Stocks, bonds and Real Estate and Real Estate in different geographic markets. Thanks for listening.