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Thursday, January 12, 2006

Scott Burns reflects on what he's learnt

I know this is late, but I think it's very much worth reading:

I came of age in Boston. There are a lot of smart people there. If you doubt it, just ask them.

I could easily populate this column with the brilliant money manager of the moment. I also enjoy listening to smart, articulate people.

But 40 years of investing has taught me that rented brains seldom help us build our nest eggs. Rented brains feel a deep spiritual need to build 20,000-square-foot log cabins in Jackson Hole with the return on our money.

That's why some readers think I am Johnny One Note, always writing about investment expenses rather than the hot fund, product or stock of the moment. But indexing and keeping things simple is the way for you and me to succeed.

The other ways are how Wall Street succeeds. Big difference.

The more I learn about finance, the more I think that paid money managers are a fool's game, especially if you're a highly technically proficient person (like a software engineer). Financial planning is not harder than C++ programming, but it can have a huge effect on the outcome of your ultimate wealth, so delegating it to someone else (and someone who can have major conflicts of interests) can lead to extremely bad outcomes, such as the second question Scott Burns answers in this column.

Even more horrifying, however, is the lack of knowledge among Americans about basic finances:

Studies show that many people overestimate their knowledge of everything from inflation to risk diversification and compound interest. One survey in Australia found that 37% of people who owned investments did not know that they could fluctuate in value. In America 31% did not know that the finance charge on a credit-card statement is what they pay to use credit.

31%!! That's almost one third the population! No wonder Americans spend $50 billion a year on consumer credit interest.

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