Oct 22, 2010

Height of Financial Stupidity



Only two things are infinite; the universe and human stupidity, and I’m not sure about the former.

--Albert Einstein

Tenzing on Hillary and Hillary on Mount Everest is the height of heights; peeing through key hole of a glass door is the height of stupidity.

Now, what’s the height of financial stupidity…there’s a not one but many…most of us continue to violate some basic and simple financial truths and make stupid financial choices.

It is very amazing to see how people get sucked in by the financial traps set up the financial industry; banks, stock brokers, life insurance companies, wealth management firms continue to harness the financial stupidity of people to make money.

Human stupidity is the other name of irrationality, self deception and willful ignorance and is the
single biggest contributor to human suffering. Let’s see some of the ways in which people act stupid to ruin their financially life:

Examples of Financial Stupidity


Real Estate is the best form of investment

1. Investing in property thinking that just because land is in short supply, property prices can only move skywards.

2. Buying a residential house just to save on rent without considering the opportunity cost of money.

3. Going for a home loan to save tax even if one has enough of spare money to invest forgetting that like tax, interest is a cost borne by the borrower.


Investing means trading stocks/ mutual funds

4. Either going 100% in stocks or 100% in bank fixed deposits.

5. Indulging in ‘market timing’ or ‘stock picking’ ignoring the fact that more than 80% returns of an investment portfolio are determined by ‘asset allocation’.

6. Investing in Mutual Funds solely on the basis of returns without considering the risk undertaken to earn those returns.

7. Investing in Mutual Funds based on short term returns and / or dividend declaration.

8. Investing in IPOs by borrowing money to make listing gains.

9. Investing in PMS considering it to be a wealth management product not understanding that it is a high cost ‘Portfolio Mismanagement Scheme’.

10. Getting lured by the fancy names of financial products.

11. Having an over-diversified investment portfolio with too many stocks/mutual funds leading to unnecessary duplication.

12. Buying jewellery for investing in gold instead of investing through gold ETFs.


Insurance is a tax savings and investment tool

13. Investing in life insurance not knowing that it can be lethal for financial health.

14. Not buying adequate insurance coverage.

15. Investing in life insurance policies from LIC thinking that money is safe.

16. Buying life insurance just to favor a relative, family friend or a neighbor.

17. Mistaking insurance agents––peddling life insurance––for financial advisors.

18. Buying / investing in multiple insurance policies.

19. Falling for guaranteed returns schemes.


Enjoy now, pay later

20. Considering fuel as the only cost of running a vehicle.

21. Buying /renting an expensive/unaffordable house by overstretching the finances.

22. Falling for zero interest rate schemes forgetting that processing charges is also a cost.

23. Spending to gain more points on loyalty cards and credit cards.

24. Not thinking twice before buying an expensive car or the latest gizmo, just to impress friends, relatives and neighbors.

25. Handing over a tip to a waiter even if not satisfied with the service…just to avoid the embarrassment.

26. Borrowing to finance a depreciating asset while own money is lying idle in bank accounts.

27. Borrowing money based on quoted ‘flat rates of interest’, not understanding that actual cost of borrowing is 2 to 3 times that of flat interest rates.

28. Choosing complexity over simplicity by mindlessly acquiring multiple credit cards, opening multiple bank accounts, investing in multiple mutual funds, buying multiple insurance policies.




29. Taking a casual approach towards managing money which has been earned the hard way, not understanding that managing money is as important as earning it. Put differently, working hard for money but not allowing the money to work hard.


Taxing the brains

30. At last, the height of financial stupidity: Standing in long queues to file tax return on the last date.


Is there any other financial stupidity I have left out? How do you handle your money? Judge yourself whether you’re a financially intelligent or a financial idiot?


The only way to comprehend what mathematicians mean by infinity is to contemplate the extent of human stupidity.

--Voltaire


Also see:

1.The reason behind increasing complexity
2. Hidden Flaws of Spending

11 comments:

  1. Excellent collection of points. Just want to add one from my side.

    Investing your hard earned money without understanding the product rather than ignoring great articles like this which can help you to increase your knowledge.

    Keep it up

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  2. Two things are infinite; human stupidity and the universe, but I’m not sure about the later NOT former.

    ReplyDelete
  3. Good article.
    P.V.R. Somanadha Sarma

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  4. Thanks for correction.

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  5. Excellent points mentioned here. Keep up the good work

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  6. Another common stupidity is to keep piling your savings in savings back account rather than investing.

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  7. Thanks a lot for such a good points. I have taken a lot of help from your articles about investing. Please keep it up.

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  8. 1. Borrowing on your Credit Card to splurge.

    2. Falling for EMI schemes without looking at the 'processing costs, documentation costs', which when included, the cost of EMI become quite high.

    3. Not taking a medical insurance policy for self and family separate from the policy given by the Company at work.

    4. Moving jobs without taking the effort to transfer and consolidate your PF.

    5. Premature withdrawal of your PF and paying tax on the same.

    6. Paying for Term Life policies upfront - recently heard that a colleague of mine took a Term life policy for 20 years from Metlife and paid the premium upfront!.

    7. Taking term policies from agents rather than go online. Online polcies from ICICI Pru and Aegon are 50% the cost of policies sold by agents.

    Will add more in time.

    Regards

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  9. Hi Fisher
    Thanks. Thought provoking article, I especially like the usage of the phrase - opportunity cost!! I'm sure there must be a lot of ingenious (as in originality) ways to attain the pinnacle of financial stupidity. I guess its all a question of when we exhibit these traits and how we avoid their occurrence/recurrence.
    regards,
    Hari

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  10. A belated happy Thanksgiving to you. Thanks for continuing your work on this enjoyable blog.

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  11. Hi! This is such a great article and I am sure a lot of money saving enthusiasts are going to benefit from this. Keep it up! I am Diana Mathew, an Australian Entrepreneur, ebook author (The Money Tree by Diana Mathew) and a Saving Money guru.
    If you have time, maybe you can visit me too:
    www.mymoneytree.com.au

    ReplyDelete

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