New Zealand’s most distinguished economist reviews New Zealand’s premier financial agony aunt
Newsroom 29 April, 2021
Because economists are believed to know the mysteries of finance, I am often asked to give financial advice. I advise that I would never take the advice of an economist without paying for it; that it is never worth paying for an economist’s financial advice (leaving, incidentally, a logical problem which stumped Bertrand Russell. One version of the Russell paradox is a card; one side of it says “the message on the other side of this card is wrong”. Flip over and the other side says “the message on the other side of this card is right”. I have just given the advice not to take my advice; are you going to take it?
Giving financial advice is skilled and dangerous. After all the advisor could be sued if the advice goes wrong, although an awful number of unlicensed – and in my experience incompetent – advisers got away with it in the run up to the financial company crashes in 2008. There has been more protective legislation since – I am not licensed to give financial advice – which is, no doubt, why there is the 114 word disclaimer on the verso to the title page of Mary Holm’s latest book A Richer You: How to Make the Most of Your Money. Basically it says that neither she nor her publishers are responsible if you try to follow her advice and the investment comes unstuck.
Holm has been writing a weekly column offering financial advice in the Weekend Herald since 1998. This book is a selection of 184 of her interchanges. Essentially she is an agony aunt who discusses financial issues rather than relationship ones. Not that, as some of the book’s letters show, they can always be separated.
A good agony aunt usually provides prudent, informed, commonsense, not without humour and with a compassion for those at the other end of the interchange. Holm passes this test well; I especially liked her occasional reminding that it might be the time for her correspondent to spend something on themselves. Savings are a means of spreading out one’s consumption – of having the fun – over time, not of being dutifully miserable always. Admittedly, we do not know the future – including the adverse shocks we will experience and our how long we will live – so it is always wise to have a reserve for such uncertainties.
Readers may be misled by reading too casually the book’s title. It is not promising to make one rich, but rather a little richer. The vast majority of correspondents are not rich and never will be. But if they follow the tenor of Holm’s advice (not the actual advice itself of course – see disclaimer) they will be a little bit wealthier and a little bit more materially comfortable. On average of course; there is luck in the investment game including bad luck – sometimes very bad luck.
One of the weaknesses of financial agony aunt columns – but not so much of personal ones – is that there is not a lot about disasters. Apparently people who suffer disasters do not have enough savings to require further investment advice. Yet, a central lesson in investing is that while one can inch up the return, it is avoiding the crash (and fraud) which makes the greatest difference in the long run.
The book’s big limitation is the absence of a discussion on leveraged investing – of borrowing to leverage your asset to get a bigger return. Often it works for a while – booms go on but the bust which follows is bigger and more painful. All financial investment is on the brink of a Ponzi scheme; those taking their money out are obtaining the cash from those joining. (The difference is that shares, say, do pay dividends.) I do not recall the book mentioning Ponzi or a Minsky bubble. I am sure that Holm knows about both, but her correspondents generally do not. Perhaps an economist should write to her, under a pseudonym pretending ignorance, asking if Charles Ponzi or Hyman Minsky have any relevance to today’s investor – they do, they do.
That may be the difference between an economist and a financial advisor. The former looks for context. For another example, why are real interest rates falling; will the fall be permanent? There are not simple answers but the prudent investor needs a context in order to plan a consumption flow over their lifetime.
Lower real interest rates increase the temptation to leverage invest. I am not uncomfortable about Holm’s response to a query about investing in bitcoin: ‘I’ve read about bitcoin but it’s not really my cup of tea. But you sound braver – or if you don’t mind me saying – perhaps madder’. She finishes her discussion with ‘Please – only with money you can afford to lose.’ I would have added ‘and please, please – don’t borrow (or sell your house) to invest in bitcoin.’
(As an aside, you will notice that the recent change removing the tax exemption on interest on rental housing is a restraint on leverage borrowing, whatever the case for or against the change.)
A Richer You is a well-presented book with large type and generous spacing between lines (leading) but reads as well as you’d expect from a a newspaper columnist. Some of the material is quite technical and requires some prior knowledge – such as a background on how kiwisaver works. My presentational grumble is that all the columns should be dated. When they were written may matter. For instance, one column assumes that safe interest rates are 7 percent p.a. – clearly not a 2021 column, but the naive reader might think that level normal.
An instructive insight is that even financial advisers occasionally make mistakes. Holm admits to one. She was asked about a family who had various high-cost debts and gave perfectly sensible advice about consolidating it. Except, the following week she admitted that she had overlooked the fact that the family had a mortgage-free home, and it would be better to take out a lower interest mortgage and use it to pay off the rest of the debts. Even Homer nodded.