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Pound Foolish: Exposing the Dark Side of the Personal Finance Industry. By
Helaine Olen. Portfolio; 292 pages; $27.95 and 17.99. Buy from Amazon.com,
Amazon.co.uk
Market Sense and Nonsense: How the Markets Really Work (and How They Don t). By
Jack Schwager. Wiley; 343 pages; $40 and 26.99. Buy from Amazon.com,
Amazon.co.uk
HAVE you ever met anyone who has grown rich just by saving? Probably not. But
you may well have met someone who has grown rich looking after other people s
savings. That dark secret lies at the heart of Pound Foolish , Helaine Olen s
excellent book, a contemptuous expos of the American personal-finance
industry.
With icy logic, Ms Olen, a journalist, demonstrates that much of the advice
given by moneymaking gurus on television or in print is either fatuous or based
on ridiculously optimistic assumptions about future investment returns. Take
the idea that saving the cost of a daily latte and investing the proceeds in
the stockmarket would make you rich. Saving $3 a day, or $1,100 a year, might
be a sensible economy measure but it won t build a fortune.
Such faddish ideas are the financial equivalent of miracle diets. A belief in
instant riches lured millions into buying internet stocks in the late 1990s or
overpriced houses in the middle of the past decade, when any personal-finance
adviser worth his salt should have been advising clients to run in the opposite
direction. But optimism sells, and realism tends not to.
As well as bad advice, the gurus have plenty of expensive products to flog from
courses that teach people how to become better real-estate investors to branded
goods like a $49.99 canvas laptop bag or a $34.98 silver leather wallet. By the
time clients have bought all the books, attended the courses and stocked up on
the accessories, someone has definitely become rich, though probably not the
saver.
Savers make all sorts of rookie mistakes from following the stock tips touted
on television to paying through the nose for complex financial products when
simple low-cost alternatives (like index-tracking funds) are available. And
debtors are similarly foolish, running up big bills on high-charging credit
cards. Perhaps such lessons could be rammed home by financial-literacy courses
but Ms Olen is cynical, noting that many courses are sponsored by
financial-services companies, creating an obvious conflict of interest.
Indeed, this is one of the central problems of personal finance how to get
advice to apathetic consumers. The unwillingness of consumers to pay for advice
has led to hard-selling, high-charging salesmen taking over the industry.
Britain has just reformed its payment system for financial advice and if Ms
Olen s book has a fault, it is the lack of an international perspective
offering such examples. The personal-finance pages of British newspapers are
doughty champions of consumer rights. While she rightly attacks the high-cost
annuities sold to American consumers, she might have reflected that the kind of
low-cost annuities sold in Britain ensure that retirees do not outlive their
savings.
But Ms Olen is right to home in on the biggest problem that personal-finance
gurus neglect; people earning $20,000 a year will struggle to pay for the
basics in life and will simply not be able to save their way to a life of
comfort, let alone riches. As Ms Olen concludes, We do not live in an economic
environment that will permit mass personal-financial progress, no matter how
well meant the guidance or advice.
Like Ms Olen, the latest book from Jack Schwager, best known for his Market
Wizards books based on interviews with traders and fund managers, takes a
potshot at TV stockmarket tipsters. A four-year analysis of the share
recommendations by Jim Cramer, star of CNBC s Mad Money , shows that while the
stocks rose on the day he mentioned them, they underperformed the market over
longer periods. The experts polled by Louis Rukeyser on Wall Street Week (a
programme on public television) proved to be almost perfect contrarian
indicators; they were most bullish in December 1999, at the peak of the dotcom
bubble.
Mr Schwager s book starts off with plenty of sound, basic advice beware of
assuming that past high returns can be maintained, for example before expertly
demonstrating that a leveraged exchange- traded fund (a fund that promises to
deliver an enhanced market return) is a dreadful investment because of its
structure, being almost bound to disappoint.
He then moves on to more sophisticated measures of risk, rightly pointing out
that faulty risk measurement is worse than no risk measurement at all, because
it may give investors an unwarranted sense of security. As the book develops,
beginners may start to struggle with mathematical concepts, such as Sortino and
Calmar ratios, that regularly get trotted out.
Oddly, this curate s egg of a book then veers off in a different direction a
lengthy description and defence of the hedge-fund industry. Mr Schwager
demonstrates that hedge funds are less risky than many mutual funds, but he
does not really deal with the central issue; that their fees are too high for
the returns they deliver. One suspects that Ms Olen would respond to his
conclusion that hedge funds are a desirable investment even for
unsophisticated, lower-net-worth individuals with a loud, and well-deserved,
raspberry.
from the print edition | Business books quarterly