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Why So Much Financial Advice is Wrong

Why so much financial advice is wrong

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The internet is a strange and fascinating place. There is a wealth of information, but not all of it good. Lots of people write content just to sell you stuff. And others are just idiots.

Even good-hearted people trying to impart knowledge can only speak from their own experience. The decisions they made were “good decisions” because they worked out. That, however, doesn’t mean you can or should make the same decisions now that they made in the past.
As much as personal finance bloggers like to say that the path to riches is simple and straightforward, personal finance is personal. Most financial advice is wrong because it fails to take into account how different each person’s situation is and how fast the world is changing. No one’s experience is universal, and the lessons that worked for one person may work for others, but they also might not.

[Disclaimer: This post may contains affiliate links. I may receive a small amount of money if you click and buy the linked products, but I only recommend products I truly believe in.]

Most advice turns out to be a series of instructions about how to become the person who is giving the advice. People seem to have a powerful need to re-crate themselves. . .

Alan Dershowitz, Letters to a Young Lawyer

The Role of Timing in My Financial Success

My high income is directly tied to attending law school. So I could write an article about how everyone can go to law school to get a high-paying job, right? No, because I know enough about the journey to know that my path was not guaranteed even when I did it, and that what I did back then might not make sense now.

My graduation timing was fortuitous. If I had graduated in 2010 or 2011, I would have graduated into an unexpected recession in the legal field. At that time,  many graduates were unable to find any legal employment, let alone high-paying jobs. Research shows that graduates from those years are still lagging behind financially compared to graduates before and after the recession. But graduating earlier wouldn’t have solved that problem. Many who graduated in 2008 or 2009 were laid off early into their careers and may have struggled to find another job after that.

Instead, I graduated in 2012, which showed vast improvements in job prospects over the 2010-2011 graduates. Furthermore, because we stared in 2009, we all already knew that the job market was difficult and were going in eyes wide open, which surely made a difference in our strategies for finding employment.

The Role of Dumb Luck in My Financial Success

I was also lucky to be hired at a high-paying job. At my law firm, over the years, I interviewed dozens of candidates from good schools with good grades and most people seemed perfectly fine. I don’t have any real understanding for why I was picked. And I feel lucky that I was. Granted, I went to a top ranked law school. But still, someone who graduated near the top of my class couldn’t get a job at any law firm and was still meandering years later.

Then there were the people who got fancy jobs but hated them. Someone a year ahead of me quit his job after taking the Bar but before starting law. I know more than a few people who rage quit after a few years. They did everything right, but, for these people, the legal field just wasn’t for them.

Working at a law firm before pursuing law school is not a good indication of what it’s like to be a lawyer. Like many things, you have to do it to really know what it’s like. And I was lucky that I was largely happy with my job.

We Can’t Trace Our Own Decisions that Led to Success

I made a spreadsheet to figure out when I would break even from law school. In this spreadsheet, I assumed I would continue working at my first job and save the same amount. My break-even point was six years past law school graduation, even though my salary out of law school was 4x my entry level salary after college.

But I had to count the opportunity cost. It was 3 years without working and $200,000 tuition. Also, I was quite a little saver before I went to law school, so I would have continued that. This habit would have been particularly beneficial because I would have been saving while the stock market was climbing. Of course, I also had to assume that I would have been steadily employed throughout this whole time period.

Was going to law school the right decision financially or career-wise? I can’t  answer without much more information and until I’m much further along in life. Is going to law school the right decision for you? I don’t know the ending to my own story yet, so I certainly can’t tell you if going to law school will be right for you. For right now, my decision was fine for me. That idea could change.

We Can’t Even Know if We Are Successful

Even if a couple has been married for 50 years, we can’t really judge if their relationship advice is sound. We don’t know if they’ll make it 51 years or if they’ll change their tunes tomorrow.

Someone might have success right now, but that doesn’t mean they know what got them there, how to stay successful, or if their plan will work for you. Maybe if they had failed, they could have gone a different way that would have led to even greater success. It’s like parents who give advice – maybe their kid would have been great with a different parenting style, or maybe the kid would have turned out better. We just need to look at how different things turn out for siblings to realize that parenting style is not the end all-be all in how we turn out.

All we have is a snapshot, but we never understand the whole picture until the end (if we even get it then). We could look at any number of luminaries who were called failures at one point. Steve Jobs was a failure multiple times in his life and Abraham Lincoln was a failure until he became a raging success. We would be wrong to have written them off as failures. Conversely, there are others who succeeded early on and then flamed out. When we follow a living person’s advice, we don’t really know how they end up. The arc of the universe is long.

Be wary of people who are only part of the way along their paths, which is everyone. They don’t know their true endings yet.

The Trouble With Following Other People’s Paths  

Pre-recession, many people viewed law as a very safe and prestigious job. Post-recession, there have been a lot more horror stories.

The trouble with a big investment like law school is there is a lot of known risk (tuition, opportunity cost) and a lot of unknown risk, i.e. all these forces outside your control that will determine whether you view your decision as a good or bad one. If someone graduates into the recession and can’t find a job, then the decision seems like a “bad” one. If the person gets a lucrative job, then it’s a “good” decision. But each person started with the same information and each person made the same decision. It’s not a given that the person with the “good” decision worked harder or smarter. We can only control so much of our story. Sometimes the better team doesn’t win.

It’s a poor way to judge the thought process of a decision by its outcome when it is external forces that changed the ending. (For more on this topic, I would highly recommend Annie Duke’s Thinking in Bets.) You can make perfectly good decisions that go awry for reasons outside your control. It doesn’t mean the decision is a good or bad one. It just means that luck was involved.

We Don’t Definitively Know What Decisions Were Right

If you were running an experiment to determine cause and effect, the results would be meaningless without controls. Real life is not like that. No one has an identical twin who made identical life choices, all save for one pivotal decision, our variable.

Instead, most people giving advice think, well I became rich. How did I do this? And they retrace their steps and pick one decision that seemed to have worked out for them. But they aren’t considering what would have happened in the alternate reality if they had pursued other jobs, other careers, other spouses, other lifestyles and how the timing and dumb luck affected how those decisions turned out. And truly, even if they did consider this, they would only be guesses about how their own life would have turned out differently. Using the same logic on other people’s lives – they’re just random stabs in the dark.

We Shouldn’t Judge Decisions by their Outcomes

Many want to say that the difference between the rich and poor is the right decisions, but there’s a lot of luck involved. Some of the same decisions that make people rich also make people destitute.

  • It was a great decision for Mark Zuckerberg and Bill Gates to drop out of college to start their own businesses.
  • The failure of other businesses, however, has led some to homelessness. And most college dropouts do not become billionaires.
  • Some people get married and have a stable job, leading to wealth.
  • For others, the breakup of a marriage can lead to destitution.
This same logic applies for buying a house v. renting, pursuing one’s passion, buying a hot stock, etc. This is the problem with seeing other people’s outcomes and tracing back to one or two decisions. We don’t know if that person could have done better making another decision. And we can’t know whether making that person’s decisions from 10 years ago would be the right decision for us now.
A lot of decisions that work for some of us, won’t work for all of us. A lot of people followed good advice and got into a lot of trouble. The path is not as error- and risk-free as we purport it to be.

Why So Much Financial Advice is Wrong

I believe strongly that imitation is not the highest form of flattery, becuase truly unique individuals can never be imitated. But you can learn from them, so long as you realize that you are a different person, with your own dreams, backgrounds, and priorities. Understand the differences and extrapolate from their experiences and aspirations to your own unique life.
Alan Dershowitz, Letters to a Young Lawyer
There was a time when people considered mortgage and student loan debt “good debt.” After the housing bust and ballooning student loan debt, people don’t say that anymore. I consider it my personal mission to tell people that college is not worth the cost, though most people on the Internet would beg to differ
The world is changing rapidly. Good advice from our parents’ age doesn’t work now. Even good advice from a few years doesn’t work now. Those who give advice need a reality check and a dose of humility. And those who seek advice should realize why so much financial advice is wrong. One should be open to advice but be ready to adjust the advice to fit one’s own personal choices and unique life path.

Conclusion – Why So Much Financial Advice is Wrong

I’m not saying you should make bad decisions. Though we don’t know the future, we can still make the best decisions we can given the information at hand, because they still work A LOT of the time. There are certain decisions that are good, even if we can’t predict perfect outcomes:
  • Trying to live within your means (it’s not always possible, but trying is important).
  • Developing skills that will be profitable to you and others.
  • Surrounding yourself with good influences and a good environment, to the extent you can.
  • Exercising to the extent we can.
  • Drinking enough water.
  • Investing in index funds.
  • Trying new things, and trying again until you succeed.

But many of the other decisions you may make – whether to choose a STEM major, whether to become a lawyer/doctor/plumber, whether to get married or stay single – are not universal. Those routes worked for some people but might not make sense for you. Or they might lead to lucrative careers but you’re still unfulfilled. They are not you and you are not them.

The best we can do is to carefully consider our options and try to make a decision that – if everything falls apart – we hope we can be happy with.

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