The free personal finance tips market is glutted. Not only do you have this fine blog, but there are, literally, thousands upon thousands of articles, and hundreds of books, radio shows, and TV shows on personal finance. And, in a furious storm of repetitive sameness, how does a personal finance guru stand out? Easy, they go against the grain, make a fuss, and/or say something sassy or stupid.
So, you end up with some pretty inane advice, from some pretty questionably qualified people.
An excellent example of leveraging attention-getting rhetoric into crazy-land is reliably demonstrated by the works of one Robert Kiyosaki. A while back he was featured in Yahoo! Finance as an “Expert” and wrote financial advice columns for the site. I managed to dig up one of his old columns through the Internet Archive. You can find the archived article “Playing the Mutual Fund Lottery” here. I know it’s old, but it’s just such a great example of what I’m talking about. Here are some excerpts – with my comments in blue:
A few weeks ago I was talking with Tom Wheelwright, a CPA and business owner, about why people play the lottery. His comparison of the lottery to investing in mutual funds is worth sharing [right now, I’m wondering how far of a reach this will be].
Even though he’s not an investment advisor and never presents himself as one [thank goodness – you’ll find out why in a second], clients continue to ask Tom what to do to prepare for retirement. “Should I max out my 401(k) contribution?” they ask. “Should I open an IRA? Or should I put more in my profit sharing or pension plan?”
According to Tom, and contrary to popular belief, none of these are wise investments. [Well, I guess this makes sense in that 401(k)s and IRAs are types of accounts and not investments… but I’m not sure that’s what he means.] So here, in his own words, are his thoughts on the subject.
Let’s take a break here. Now, it appears that Kiyosaki is introducing the actual author of the article. While Kiyosaki himself may not have written the article, he is certainly endorsing it. This article’s views are also very consistent with his writings elsewhere. So, while some may squabble that I’m being unfair to Kiyosaki by criticizing an article mainly written by Wheelwright, I would say that it’s written under the Kiyosaki name, so Kiyosaki is responsible for it.
Among other reasons, 401(k)s and IRAs involve putting money into an investment vehicle over which investors have little control [Wait, what?]. And since most people end up choosing mutual funds as their primary investment within these plans, playing the lottery would be a better way to go [OMGWTFBBQ!!!1!].
STOP! It’s going to take us a few minutes to unpack all the wrong this guy managed to cram into just this one paragraph. First, the control issue: investors control the money in their accounts. I’m not entirely sure why he’s complaining that they don’t control the investments, unless he means to condemn the fact that investors don’t choose the underlying securities in the mutual fund. Which is what mutual funds are designed to do for you. So, that’s like being mad at a washing machine because it doesn’t clean your dishes. That’s not what it’s for. It’s also important to note that IRAs can invest in individual securities, it you open your IRA account at a brokerage firm; and that some 401(k)s allow their participants to invest in individual securities. So… what’s the problem again?
“…Since most people end up choosing mutual funds as their primary investment within these plans, playing the lottery would be a better way to go.” WHAT!?! That doesn’t even make the most remote amount of sense! Ok, we all know how the lottery works. You give the cashier money at the quickie-mart, and then you get a worthless piece of paper. Very rarely, the paper is worth more than the money you gave the cashier. Apparently this is fun in some way. Contrast this with a mutual fund: you send your check to the mutual fund company, where your money goes into a fund that invests in a variety of securities. When you want your money back, you get the value of the shares at the end of that day.
These two things are not the same.
Beyond this, I would say that it’s irresponsible in the extreme to compare investing in mutual funds to the lottery. Anyone who has even rudimentary levels of financial literacy would immediately dismiss this article as ridiculous. But what about the people who don’t know better? They’re going to be horribly, horribly misled.
You know what? There’s so much fail in this article, it’s going to take me a few posts to deconstruct it. Look forward to Part 2!