Are You a Money Moron? Where’s Our Financial Common Sense?

By now, all those New Year’s resolutions we made are beginning to fade. The most popular one is always around dieting and health. While the mantra of “step away from the pizza and hit the salad bar” may have been really strong in January, by now you might be ordering extra cheese on that pizza by convincing yourself that it’s a great source of calcium.

The second most popular resolution is around money. The holiday credit card bills could be beginning to trickle in, and they are starting to blur your vision. You may be resolving to stick to the budget, save more and spend less. But how about resolving to not fall into Money Moron Syndrome?

OK, this is going to seem pretty harsh, but let’s get real: I’m getting sick of people complaining about the economy, inflation, the stock market tanking, FTX crashing and taking their money down the toilet, Bitcoin hitting the rocks... Let’s unpack all of this so you can smarten up for the new year.

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How We Got Here

I’ll keep this short. Starting in early 2020, the pandemic virtually shut down the world and kept most people at home, with the exception of workers considered essential. While many people were tooling around in their PJs and trying to look alert on Zoom, they were not going to restaurants, commuting to work, buying gas for their cars, traveling, buying lots of things … you know what happened. At the same time, there were other product and supply disruptions that caused ripple effects through the economy: Russia started a war with Ukraine a year ago, and we sent arms to help out; semiconductor and other supply shortages were rampant; ports backed up, leaving thousands of goods stranded in transit. Those are among the most notable.

Let’s just agree that demand was really down. What happens when demand is way down? Prices go down. Deflation happens. That means that inflation hit historic lows. Oil prices even went into negative territory. The Fed cut rates, and mortgage rates hit new lows. People began to expect that this was the new normal. It wasn’t.

Some argue that inflation rates were below 1% at the bottom, but it’s really hard to tell, as the government pumped billions into the economy via subsidies, sending money to businesses and households so people could hang on. This new money surge also contributed to future inflation.

Once the pandemic eased, people took off their PJs and hit the restaurants, bars, airports, clothing stores in person and online … And demand soared.

So, here we are. Demand for goods is up. What happens to prices if demand increases faster than supply? You got it: Prices go up. When prices go up, inflation goes up. Why are people so shocked?

What Is Money Moron Syndrome?

Definition of a moron: A person who is considered foolish or stupid. Benjamin Franklin said it really well: “We are all born ignorant, but one must work hard to remain stupid.”

Of course we have inflation if demand is going through the roof. We all should have expected that. Why is everyone so caught off balance?

With people suddenly back in cars and on planes, why would anyone think that fuel prices would stay low? Many people also decided to stay home and not work — did anyone think that employers wouldn’t then monetarily entice workers to get out of their PJs and return? Did anyone think that when meat processing and other plants closed during the pandemic, that prices wouldn’t rise once they started functioning again?

But that is only half of what equates to Money Moron Syndrome.

Don’t Put All of Your Eggs in One Basket

My heart does break for the elderly couple who said that they lost all of their money because they had invested their retirement account totally in FTX. I don’t want to be unsympathetic, but this is another tragic example of my thesis. What were they thinking?

The very basics of investing teach us to diversify our portfolio. A diversified portfolio of investments refers to choosing different types of investments in a variety of assets to mitigate risk of putting all of your eggs in one basket. We even teach our young children Not to Put All of Their Eggs in One Basket.

Crypto assets are speculative. It’s fine to have a small amount of risk assets in your portfolio. The older you get, the more conservative your portfolio should be. You don’t have the time horizon to make up losses.

What part of putting all of your retirement investments in FTX makes sense? Or frankly, what part of putting all of your retirement investments in any one asset class makes sense? I would be doing the same eye-rolling if you had put all of your money into gold.

I Have a Bridge for You to Buy

Here is some good advice: If you don’t know what it is, don’t eat it and don’t buy it. Here’s another good piece of advice: There is no such thing as a free lunch.

You don’t have to be an expert in crypto, or any investment, but you do need to understand the basics and the risks. If you want your crypto wallet to be made of leather, or you think that the term “ape” (or “aping”) refers only to monkeys, you may not want to jump into these new waters.

Don’t get me wrong. You don’t have to speak the new lingo of crypto to put a toe in the water. I’m convinced that young people are just making these new words up each day to make the rest of us feel old and stupid. It’s like a club with a secret handshake. But I am saying that you need to know how all of your investments work — that means understanding the volatility, the risk, the liquidity and whether the time horizon fits your need for the money. Investments should help you sleep at night, not wake you up in a cold sweat.

How to Know If You May be a Money Moron

If it looks too good to be true, it probably is. Money Moron Syndrome will creep up on you in strange places and may cause you to jump into a bad investment. Have you ever been to a cocktail party where a friend — or worse yet, your brother-in-law — tells you that he is getting a 57% return on his new hot investment? Your knee-jerk reaction is to ask how you could get into that. That’s the Money Moron Syndrome.

Or do you watch one of those entertainment financial shows? Note that I stressed the word entertainment. That’s because that’s exactly what they are. Whatever their hosts or guests tell you is old news. The market has already reacted to it. If you buy on that advice? That’s the Money Moron Syndrome.

Sticking to Basics and Common Sense Can Help

You can take a more measured approach to investing. Do what Peter Lynch did years ago when he wanted investors to walk through the grocery store and figure out what necessities people would buy in a recession and make common sense investments. Even in tough times, people need to buy basics, like milk, bread, meat, vegetables, etc. They don’t need cookies, cake and other luxuries.

This strategy makes for great dinner conversation. I’m making this very simplistic, and it doesn’t mean that I want you to fire your financial advisers — I just want you to be an active part of your investment plan and work with them.

Get the family together and discuss what companies or sectors could be the winners longer term and why. For instance, America is aging, so what are some of the sectors that could benefit from that? Health care, medical devices and wellness sectors are obvious ones. Your young kids may even come up with other ideas, like wheelchairs, soft slippers and magnifying glasses.

This may be more exciting for your kids to think about. If they believe that the digital world is here to stay, what sectors will this affect? Your kids can really use their imagination here. I think it will actually affect almost every industry, even the hands-on ones. I imagine a world where travel, medicine, finance, wellness, education, food, work, entertainment, art — just to name a few — are connected via the digital world. What are their thoughts?

The great news is that you do not even have to pick the companies that will be the absolute winners in any one of these sectors. Financial houses package these investments into products, called baskets, that you can buy, a collection of stocks, for instance, that are all in the same industry.

Don’t beat yourself up if you have made some bad investing decisions. We all have, and we can learn from our actions. I guess the people with the best advice are the ones who have made the biggest mistakes.