How can I avoid bad financial advice?

My original title for this post was ‘How can I find good financial advice?’

But when I read through the draft, I realised I’d have to save that for a follow-up. Most of what I had written focused on avoiding bad financial advice.

Prior to leaving my job for a life of freedom and world travel, I worked as a researcher and lecturer. The subjects I most enjoyed teaching were those where I got to work with students on research projects. I got them to read existing research studies, and eventually, design and carry out their own.

But most of my students had career aspirations that lay outside of research. They wanted to become language teachers, or translators. So they would ask, “why do we need to know this stuff?”

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Why we need to learn about research

I believe that we all need to understand research not only for our careers (e.g. a teacher understanding educational studies) but to enrich our lives in general. Financial well-being requires the ability to manage resources effectively, plan ahead, and make informed financial decisions, says Drever et al. To make effective decisions, you need basic financial literacy, as well as financial research and critical thinking skills.

“Isn’t that why we should rely on experts?” you might ask.

The problem is, being able to distinguish true experts (as opposed to spruikers peddling bad advice for their own profit) often requires a fair bit of knowledge in the first place.

Review the literature

The first thing I asked my research students to do was to ‘review the literature’. This means reading as much as you can on a topic until you reach ‘saturation‘.

What’s the saturation point?

Grounded Theory describes the ‘saturation point‘ as when you are finding no new ideas, only repetition. This is something I experienced when researching my PhD, and also something I experienced reading about finance.

A sponge that is totally saturated doesn’t soak up more water no matter how many times you dip it in the sink. You want to try and fill up your knowledge to that point too, by exposing yourself to as much information – and that means, from as many different, reputable sources – as possible. But you also want to know when to stop.

Maybe you’ve heard of ‘analysis paralysis’? If you overanalyse a situation and find yourself unable to make any decision, chances are, you haven’t noticed that you reached saturation some time ago.

Why is saturation important?

If instead of reading widely until you reach saturation, you only read (or watch, or listen to) one or a few authors or gurus or podcasts, you won’t necessarily know whether to trust them or not.

In my reading (and watching and listening!) I have certainly come across some ‘outliers’ whose ideas on finance stray far from the norm, and whose advice was misleading at best, and dangerous at worst.

In research more broadly, one of the important principles is that of ‘triangulation‘ – the idea that rather than looking just at one source, you should try and get your data from multiple sources, and if they disagree, find out why.

A (scary!) case study: ‘advice’ in a bubble

A couple of years ago, I went to a property investment seminar staffed by a rotating roster of ‘gurus’. Most had dubious-sounding methods for making a buck on the property market, including targeting recently bereaved families in the case of one woman’s seminar.

Importantly, laptops, tablets, and mobile phones were not allowed. Not because using them might disrupt other participants (even having them on silent mode was unacceptable) but because, the speakers claimed, they wanted you to give your full attention.

This, of course, started ringing alarm bells in my head. It reminded me very much of the situation in which unsuspecting holidaymakers are lured into an ‘art gallery seminar’ on a cruise ship. Blissfully on holiday out at sea, in international waters and without access to a phone signal or wifi, travelers purchase artworks at inflated prices from artists they’ve never heard of, which, had they been on land, they could have easily looked up and found their ‘true’ value. The modern equivalent of this is the Google or Facebook filter bubble.

As the presentations progressed, it became obvious to me why the speakers did not want their audience to have access to the internet. One, for example, claimed that 6% is a reasonable inflation rate to assume. This is so wildly untrue, I almost fell off my chair.

The importance of triangulation and primary sources

At the time of his speech, Australia’s inflation rate was around 1.5%. What’s more, the RBA aims to keep inflation between 2 and 3%. We haven’t had 6% inflation for decades. Not since the RBA put its target in place. His assumption was entirely unreasonable. And he used this to scare people into thinking that pretty soon, their coffee would cost over $50 a cup.

I knew how wrong this was because, at the time, I was a member of a forum on which I regularly discussed topics like inflation. In addition, I had a husband who was working in the finance industry, and I subscribed to a number of online newsletters. I followed a variety of finance blogs. And I had just finished reading and reviewing a book which had displayed a graph of Australia’s long-term inflation rate. That had prompted me to go straight to the ‘horse’s mouth’, and visit the RBA website.

In other words, I had triangulated my knowledge from many different sources – including a ‘primary’ source, the RBA. I wasn’t merely relying on someone who heard it from someone else (a ‘secondary source’). Incidentally, this is why you’ll find so many links on Enrichmentality. Academic habits die hard, and I believe it’s important to cite the original research or data wherever I can, not only so that I can give credit, but so that you can check them for yourself.

Not everyone in the audience did, however.

The perfect storm: a limited time offer sold to novices without access to reliable advice

Much to my surprise (and horror) many people apparently bought this spiel. Dozens lined up to hand over several thousand dollars each for the speaker’s dubious-sounding courses on offer during the break.

Why did those people not look up some of the speaker’s more outrageous claims?

  • Firstly, as I mentioned at the start, it takes a bit of background knowledge to spot a true expert. This guy was not one, but he was presented as such, and to someone who hasn’t read (or watched, listened etc.) widely in this area, he probably appeared very convincing.
  • Secondly, anyone not trained in taking down notes rapidly and then looking for sources would likely not have been doing what I was doing in the absence of my phone or laptop. I was jotting down every suspect claim I could to research later on.
  • Finally, the real nail in the coffin was the time limit. The audience was told that this ‘special offer’ would only be available for FIFTEEN MINUTES. Not signing up then and there would mean having to fork out thousands more if you decided to sign up later on. And as Raj Raghunathan outlines in his excellent book If You’re So Smart, Why Aren’t You Happy? we tend to want something more when it appears to be in short supply. FOMO, or the ‘fear of missing out’ is real. Primed this way, people felt they didn’t have time to look anything up. After all, it won’t be long until coffee costs $50 a cup!

Soak up infoSo my first tip is, be like a sponge. Don’t slavishly follow a single guru or rely on your social media feeds for advice. Soak up as much information and advice as you can from as many reputable sources as possible. We’ll look at how to find reputable sources in the next post.

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Today’s featured image is of some books (Greek and Korean language-learning books, not finance ones though!) stacked on our sink in Portugal, as a reminder to soak up information from as many places as you can like a sponge!

What is the worst financial scam you’ve come across? Let me know in the comments!

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