Did you folks catch this recent Washington Post article by Barry Ritholtz, ‘Never buy a boat’ and other rashfinancial advice?Like so much of Ritholtz’s writing, I found myself cheering at the finish andall throughout. He starts by observing a certain paradox of his two jobs as anasset manager and a writer about investing. For the former job, he’s dispensingfinancial advice that’s hopefully sound – read, boring. But the latter jobdemands that he write interesting, punchy stories that capture a lot ofeyeballs and make the clicking finger itch.
“Neverbuy a boat” is one of those truisms of financial advice that Ritholtz argues isflashy and obvious: it purports to be universally true, smart advice. It pointsout supposed stupidities that others engage in (and you’ll, naturally, try toavoid). But in its overly simplified flashiness, it misses a crucial largerpoint: not all financial advice is that simple. “Merelysaying “no” is not financial advice; it is a form of blind risk avoidance,”writes Ritholtz. “The problem with such advice is twofold. First, itmisunderstands the purpose of money. Second, it fundamentally misses out on thebest way to make intelligent financial decisions.”
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I won’t spoil yourread of this excellent article in its entirety. But its larger point hit homefor me: in personal finance, in trading and investing, and in life, sometimeswe prize the advice that’s pithy and super-simple-sounding. But in reality, allof our decisions are enmeshed in a broader network of interrelated factors.Buying a single stock sounds easy, clear-cut. But that stock position thenbecomes part of your larger, hopefully diversified portfolio; it might be justone position in a trading-specific account, which is itself one of severalaccounts, each devoted to their own purpose and long-term financial goal. Inbuying a boat or a stock, you should always understand the broader context:what are the full costs associated with buying a boat, and can you afford thosebalanced against all your other expenses? Or, in the stock’s case, do youunderstand the position you’re holding, its potential risks and rewards, andhave a clear-cut plan to exit the position under well-defined circumstances?Ritholtz draws these comparisons better than I could at the close of hisarticle.
In a larger sense,though, I think it’s important to regard money as a tool. Once you’ve beendisciplined in enacting your financial plan, you should be allowed to burn some“mad money” on hobbies that you thoroughly enjoy. I’m a case-in-point: oursouth Florida house has a pool, which many regard as a money-pit. True, poolsaren’t the most surefire investment to build your house’s long-term equity value.But you know what? We calculated exactly how much that pool would cost tomaintain, and how much we planned on using it. And we hit the pool nearly everysingle day. Judged by those standards, that “money pit” is actually among thecheapest daily pleasures in our lives – a bargain, in fact!
What bit of simplisticfinancial advice have you ducked successfully? What’s your boat or swimmingpool equivalent?
CEO, TradeKing Group
[image: Blue Fishing Boat by Pedro RibeiroSimões on Flickr]
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