Friday, June 27, 2014

Mortality by Mortgage

In relation to mortgage, is mortality too strong a choice of word?

I looked up synonyms, just to lighten the mood a little.   How about Transience or Impermanence instead?  They may sound a little better, but synonyms for these two new words include Briefness, Fleetingness and Temporariness. 

But the latter three terms are really antonyms for Mortality, not matching my original intent. And, this post is not intended to be an English language lesson - my own second language - but rather a financial life lesson. 

More specifically, about debt.  Contrary to conventional wisdom, the wages of sin is not death… but rather, the wages of debt is death! Of course, people may rightfully argue that if they died with a debt burden they wouldn’t have a care in the world... because settling the debt would no longer be of any concern to them.  After all, they’d be dead!

Now, student loans - the new U.S. debt bubble after the recent housing market collapse - has breached the $1 trillion mark.  And still American parents send their kids to college, financed with borrowed money… because without a good education, the kids won’t be able to get a job!  

Education is wonderful. It should be ever-present, ongoing and a life-long experience.  But, it should never be undertaken in conjunction with casual acceptance of any commensurate, extraordinary debt burden.

In fact, if you graduate with student debt, you’re just dumb and you shouldn’t have been allowed to graduate!  Yes, even if your major is something really worthwhile like history, or religious studies.

As with anything else in life, if you can’t afford it, you simply shouldn’t buy it!

But what about a house?  Few people could afford to pay cash for a house, right?  No, wrong… it’s your high expectations and willingness to accommodate debt that causes you to accept a life-long commitment to the forever debt.

In fact, people over the age of 40 should automatically be disqualified when applying for a 30-year mortgage.  At 40, you’re simply too old to accommodate long-term debt with a proposed future settlement date at age 70.  Are you kidding me?

That’s not even to mention the opportunity cost of that mortgage! 

In addition to saddling yourself with a debt burden that’s forever, you also surrender your mobility, a most precious commodity. And this during a period when your earnings potential - as a result of age, maturity and related work experience - will likely peak, especially if you’re able to work anywhere!

Instead, you willingly accept a life sentence, aka a mortgage. 

A life sentence of job reliance!  Monthly income and expenditures will be closely matched (for a few decades); preventing you from building any significant wealth for retirement.

You may respond with “but I own a house!”  And you’d be wrong.  The bank owns that house until you’ve paid the last outstanding $1 due on that mortgage.  It’s theirs… not yours… you are just renting it from the bank, while also covering all the operational expenses like decorating their house, paying their property tax, ongoing maintenance and upkeep, doing all necessary repairs, etc.!

And, as an added bonus, the bank, your boss and job own you.  If you get laid off, you’re screwed, because you won’t be able to pay your monthly debts.  And if you’re lucky enough to find a new job, and quickly enough, you may even earn more money… enabling you to buy more things you don’t need, like a bigger house!

Home ownership.  A foundation of The American Dream.  A system designed to impoverish the middle class.

The middle class becomes increasingly more impoverished because of debt.  That’s because they borrow money to buy things, like education, houses, cars.  The wealthy only ever borrow money to make more money, e.g. used for buying houses, for you to rent.  And you still wonder why the middle class is shrinking?


By keeping you snagged in your debt trap of student loans and mortgages, ownership of your adult life has been outsourced to banks, the government and your employer.  They won't bail you out either, because you represent their proverbial meal ticket!

But, then you die.  Mortality by Mortgage... phew... what a relief!

Tuesday, June 24, 2014

Financial Advice

A week ago I met with a financial advisor.  A mutual business associate facilitated the meeting, so I accepted the invitation.  He made a soft pitch for my business; primarily positioning his firm as the proposed manager of my self-directed investment account.

He’d been doing this for over twenty years. The firm he represents is ranked # 1 by popular business TV channel CNBC, and Barron’s.  He showed me a demo of his employer’s website, walking me through their portfolio of services.  That was boring, because I had already looked at their website.

Their fees are based on a sliding/tiered rate scale, starting at 1.2% (of assets under management) for investment account balances of up to $500,000.  The fee for investments greater than that is 1% (i.e., for the next tier).

He explained that no clients have the same investment portfolio allocations, because every client’s requirements, investment goals, age, financial situations, etc. are different. Accounting (e.g. tax-filing), legal (e.g. wills) and trust advisory services are offered as a complement to their investment advisory services.

Seems like a bargain at the price quoted.  Who could possibly operate on a 1% margin? 

Probably people who manage other people’s money, that’s who.  Remember the Dire Straits song “Money for nothin’ and chicks for free”? As I’ve explained in older blog posts before, the Dow has returned - on average - almost 7% per year, for more than 100 years!  And this is an example of a low risk = low return investment strategy!

This means that you could literally just deposit money into an investment account, buy a diversified basket (or index) of Dow stocks, hold it for a few years… and earn a compounded, high, single-digit return over the holding period (higher with reinvested dividends).

When I left the meeting mentioned above, I immediately started questioning everything we had discussed. This character trait - questioning everything - is a by-product of having experienced people in positions of power like politicians, church ministers, teachers, etc., spreading so many untruths during the few decades of my existence, to date.

Warren Buffett famously once said that "Wall Street is the only place that people ride to in a Rolls Royce to get advice from those who ride the subway."  Have you ever paused to ask out loud (or at least just wondered to yourself if you're too shy to ask) whether the person dishing out financial investment advice has been more successful, similar in standing, or spectacularly worse off in terms of generating consistently good returns on their own investments, than you?

So, I replayed the conversation with the professional financial advisor a few times in my imagination.  He said I should provide personal information about everything; life insurance, wills, business interests, investment accounts, car insurance, property info, etc. 

I joked about not wanting to be featured on American Greed, the popular TV show where investment advisors make off with all their clients’ possessions and wealth. 

We all chuckled a little, uncomfortably so.

He said that his team would prepare a binder, with all the relevant information (above) in one place.  That would be good for my family when I die, for example.  They’d be able to review the contents of my binder, where all my important information would be available in one place.  Now this is actually a really good concept.

But, I still felt decidedly uncomfortable.  Maybe it was the concept of a physical binder?  Maybe it was two decades of Old Wall Street experience talking? 

Maybe it was the suggestion of putting my hard-earned cash into ETFs, and then threatening to charge me a management fee on top of the low-cost ETF fees?  I’m too cheap to pay fees for index investing, when I’m able to build my own indices, at no cost.

Do you use a financial advisor? If you do, you may also still use a realtor to help you hunt for a new home, pay a travel agent to book your next holiday, and write checks when you need to pay people?

Maybe it’s just me?

Maybe I simply don’t need a binder… after all; I have the Internet, WIFI, electronic documents that can be viewed on computers or laptops, and a Google Drive for storing and sharing information, including electronic folders and documents.

So, did I derive any benefit from meeting with a professional financial advisor? 


A tinge of guilt.  Being reminded to electronically scan, organize and save any all-important paper documents online. And then to make sure my family will know how to retrieve these in my absence, should they need to do so. 

As for the professional investment management choices… show me stellar outperformance vs. my own returns on investment achieved, and I may be willing to buy your binder, and listen some more!