Recently, I was asked whether Rolling Alpha is a personal finance blog. Because ‘it has a lot of other stuff that seems, you know, more like economics and stuff’. You’d be surprised at how often this question comes up. But it always concerns me – because it implies a view of the world which is…dangerous.
What is a standard ‘personal finance’ blog?
Here is a list of things that personal finance bloggers are meant to talk about (endlessly):
- Whether it’s better to rent or buy (overwhelming, the conclusion is ‘buy’).
- Cutting costs. By, for example, choosing a prepaid sim card over a contract line.
- Various listicles containing the blogger’s rules for financial freedom.
- The ‘4%’ rule for retirement #howtoknowwhenenoughisenough
- How to be frugal, because frugal is cool.
- What types of investments are best for small-time investors.
- Lots of praise for the power of compound interest.
- Tips, tools and creative strategies to pay down your <credit card debt/student loan debt/mortgage> really quickly.
- Laments about the price of groceries.
- Basic tax-planning.
- Exposés on the banks with the lowest (and highest) bank charges.
- Exposés on the medical aids with the lowest (and highest) premiums.
- Updates on how the blogger’s personal finances are doing, and how close they are to retiring at <insert age here>.
- Periodic tell-all confessions about how all that frugality has made the blogger a better and happier person.
I agree that these are all useful things to know.
But seriously, I don’t believe that they’re enough. While it might be great to be frugal*, it doesn’t help to be myopic. Or naive. All that ‘personal finance’ stuff has an unspoken assumption: that you will continue to live in a world of near stability, where the downturns are always temporary and you can rely on money in the bank.
*I am somewhat skeptical – I think it’s also important to live while you can. We need to find a balance between financial asceticism and YOLO.
A list of countries and peoples who have lost their financial freedom at least once since the year 2000
The world is full of sad stories of people losing their savings through no fault of their own. Here is a non-exhaustive list:
- Zimbabwe: hyperinflation destroyed every single pension fund, retirement fund and bank saving.
- Venezuela: hyperinflation is doing the same there, as I write.
- Syria: in 2010, Syria was a functioning country with a functioning economy. Today, the Syrian middle class are refugees.
- Yemen: since 2014, financial stability evaporated alongside the water that led to their civil war.
- Cyprus: the EU imposed a depositor bail-in in return for a bail-out loan. Those bank balances were frozen – and the more frugal you had been, the more money you lost.
- Greece: capital controls and austerity have essentially robbed pensioners and soon-to-be pensioners of their retirement plans.
- The United States: the collapse of housing prices drove many home-owners underwater, forcing foreclosures and losing them all the money that they had paid into their mortgages up to that point.
- Iceland: the massive economic recession there in the wake of the subprime mortgage crisis put many people’s retirement plans on hold. Some, almost indefinitely.
- Russia: volatile oil prices and sanctions have caused collapses in the Russian stock market twice since 2008.
Then there are stories like the Bernie Madoff ponzi scheme, in which thousands of investors lost their retirement savings. After all, he ran an asset management house. That’s what everyone thought it was, before they found out that it wasn’t.
And that’s only a few highlights from the last 16 years.
The trouble is: when we plan for retirement, we’re usually facing much longer timelines. Over 30 to 40 year time frames, many economies have undergone populist dictators and communist regimes before returning to some form of free market economy, followed by a civil war and then back to some kind of blank-slate ctrl-alt-delete. And let’s be clear: when a country vacillates on its enforcement of private property rights, your ‘retirement savings’ can be wiped away with a legislative pen-stroke. Or a gun.
Real financial freedom is about awareness
There isn’t really a substitute. While we can all find ways to be more cost efficient, we also have to be aware of the world around us. Economic and political crises happen. You want to:
- Try to pre-empt the downsides (by diversifying your risk);
- Plan to deal with them when they arise; and
- Learn how to take advantage of the chaos.
Being able to do that requires a few things:
- An understanding of your own heuristics and cognitive biases #behaviouraleconomics. That is: the things that make you panic and sell when you should be holding and (even) buying; or make you hold out when you really should be cutting your losses and taking your money elsewhere.
- An understanding of how economies work. This includes fiscal policy, and monetary policy, and the sociopolitical trends that are driving the legislation. After all, most sociopolitical forces pay no attention to unexpected outcomes: like how the drive for homeownership led to the subprime mortgage crisis, or how the waves of banking regulation have strangled the flow of credit and created a type of monetary austerity.
And while doing that, you should still be paying attention to all those things that personal finance bloggers love to talk about.
It’s why I try to write about all of the above.
They are things that even the most financially-personal people should be aware of.
Also, this may help:
A Personal Finance Serenity Prayer
God, grant me the serenity to navigate the macroeconomic realities I cannot change,
Courage to save the costs I can,
And the freedom from my own biases, that I may know the difference.
A Post Script
Finally, I actually do write about a lot of traditional ‘personal finance’ issues. Check out these two sections of the site for most of them:
Rolling Alpha posts opinions on finance, economics, and sometimes things that are only loosely related. Follow me on Twitter @RollingAlpha, and/or please like the Rolling Alpha facebook page at www.facebook.com/rollingalpha.