A Tale of Gender





There is a reason why I call this tale A Tale of Gender.  Can you guess what it is?  If you guessed that gender doesn’t matter when it comes to your money, then you are correct.  Money doesn’t care.  They say love is blind, well so is money.  If you are single, you know you must be responsible for your money because you have no other choice.  This is good news since as our culture has more and more single people, our collective financial literacy is improving.  Unfortunately, there are still those who think they can go through life as financial dependents while others take care of their money matters.  They can’t.  They might for a while, but invariably reality hits in the form of a death or divorce and they regret their ignorance.  My advice for couples is to make sure you are both competent with money and investments.  Let’s look at a tale about the perils of ignorance.

I’m sure that everyone has heard of stories like this, but in early 1989, I ran across this situation.  It still goes on today and will for as long as there are innocents.  It seems that at age 66, the widow Nancy inherited a little over $400,000 in the form of cash from her husband’s life insurance policy.  Before he died, they had owned a house in another state and after a few months she decided to sell it and she relocated to Maryland.  She bought a townhouse in close proximity to her children and grandchildren.  She paid cash for her townhouse and invested the remainder with a well-known full-service brokerage firm.  Her initial investment was $450,000.

The widow Nancy had no debt of any kind after her move and was receiving a monthly income from pension and Social Security of almost $2,000/month.  Her needs were modest, and she lived comfortably on the $2,000 per month.  She was wealthy by my definition since she didn’t need any income from her $450,000.

By the time I met her things had changed dramatically.  Her portfolio had dropped to under $70,000, and it looked as though it would go to zero at the rate it was hemorrhaging cash on a monthly basis.  I spent a few minutes looking over her statements and it was clear what had happened.  The widow Nancy was a victim of a self-dealing broker.

It seems the widow Nancy was completely ignorant in the ways of investments and it seems she was also a trusting individual.  This can be a lethal combination if you hire the wrong commission-compensated advisor, as she had.  I spent a few hours reconstructing recent history and was astonished to discover the frequency of trading in her portfolio.  I call this, “The Churn.”  A stock would never last more than two weeks before the full-commission broker sold it.  Furthermore, the commissions over the last six months alone had exceeded $144,000.  I call this, “The Burn.”  As I went back and inspected the entire record of almost two years, I saw that the account had started innocently enough with a diversified portfolio of front-end loaded mutual funds and had morphed into a full blown, 100% stocks on margin portfolio in less than a few months.  Any con man that met the widow Nancy would know that she was an easy mark, and that’s exactly what happened.  She was conned.  The combination of her ignorance and her trust led her down this ruinous path.

The story ends well, however.  I made a recommendation to the widow Nancy that she retain an attorney, and she was able to recoup her initial investment in the form of a settlement.  She transferred what remained of her account under my management, and she invested her settlement proceeds with me as well.  Unfortunately, the experience forever tainted her thinking, and she insisted I manage her money in a low-risk manner.  This meant substantially lower returns over the rest of her life than what she probably could have earned if her risk threshold was higher.  She got her money back, but she missed future returns because she had lost faith.  When you lose faith, it’s very hard to get it back.

I use the story of the widow Nancy to illustrate a point.  If you don’t know about money, the chances of having someone stealing it increases dramatically.  Many women, in particular once they get married, turn a blind eye to the family finances and only bad things can happen.  Don’t do it.  I had a great role model growing up.  From the time I was a child, my mother was in charge of the family finances and accounting.  She met with the CPA, paid all the bills and knew the location of every piece of paper and every statement.  Traditionally, my father’s role was to generate ideas.  However, if he could not convince my mother, who grew up as a farmer and became a teacher, that it was a good investment, they didn’t do it.  Periodically, the roles would reverse, and my mother would come up with the idea.  It worked for them.  It may work for you as well.  What’s clear is you cannot abdicate financial responsibility to your spouse.  Make it a team effort.

The “Churn and Burn” is a portfolio of doom that has been around since the advent of commissions.  It’s perpetuated on the ignorant and trustful.  It is only one of many potential pitfalls for the ignorant.  It’s an extreme example, but a good one for illustrative purposes.  I could go on but I think everyone gets the message by now.  American financial markets are not set up to help the ignorant.  We work under a “Buyer Beware” system, and if you’re not careful, you will get burned.  If a widow can’t be safe from financial predators, who can?  You have no alternative.  You need to learn about money.  There is no one looking out for you.  The system has a design flaw.  It is not designed to protect you.  Lastly, please recognize this is not an indictment of our regulators nor is it a cry for more regulation.  Laws and criminals breaking laws have been around forever.  Your best defense is your knowledge, and so I urge you to take responsibility before you get taken. 

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