How Some Financial Decisions Are Like Bounce Houses

December 07, 2012

I read this article about the increasing number of “bounce house” injuries and at first I thought it might have been a hoax. But then I remembered a bunch of kids’ birthday parties that I’ve attended and if my memory serves me correctly (and that’s not always such a sure thing!), there has been at least 1 injury at each party. One was particularly memorable because it was one of my good friends who was in the bounce house with her son and his head collided with her lower lip. A whole lot of paper towels and a few stitches later, she had a fat lip for over a week. Her son, to this day, jokes with her about the time he nearly knocked her out and made her go to the hospital. (It was an urgent care center but he likes to embellish a little bit for an audience.) Everyone loves the idea of a bounce house. Not everyone loves the end result of jumping around in one. They may look wonderful, but it isn’t all a 100% pure joy.

The bounce house “it all looks great from the outside” concept can be applied to a lot of things in the financial world. I have heard the following phrases over the last 10 years, and each one I’ve heard more than a few times!

These adjustable rate mortgages are awesome! By the time the rate adjusts, we’ll be able to sell the house at a big profit and trade up.
I’ll just get a few credit cards now and then as balances build up, I’ll transfer them to 0% rate cards. I expect my income to keep going up, so eventually I’ll make enough to pay them off.
I’m going to buy as much house as I can afford because house values ALWAYS go up and I’m guaranteed to make a profit over the long haul.
Investment fees don’t matter so much because with the stock market going up by 10% per year, I’ll always come out ahead.
I like a lot of the investments that my advisor has me in. I’m not sure exactly what they do, but they’re making a lot of money for me. I guess the money managers know a lot more than the rest of us and I’ll trust them to do their job because they’re smarter than me.

Now, I’ve embellished a wee bit with the last one, but the sentiment rings true. All of these phrases seemed “reasonable” at the time. But, with a serious financial crisis, a major recession, a collapsing real estate market, very high unemployment and underemployment numbers, and a volatile (at times) and lackluster (at other times) stock market, each of these phrases seems silly in retrospect. Like the bounce house, sometimes things look much better on the outside than they do in action. How can you avoid “bounce house” financial decisions?

Remember the saying “if it looks too good to be true, it probably is.” There’s a reason that saying exists! Be a little bit skeptical when things appear to be all positive with no negative. If it were really that amazing a deal, don’t you think everyone would be doing it? Would you really be that far ahead of the rest of the public? Let your inner skeptic take a look at major financial decisions prior to allowing your inner optimist to commit.
Ask a lot of questions! One of Warren Buffett’s main rules of investing, and this can be easily translated into almost every area of life (medical issues, major purchases, improving a skill, etc.) is to KNOW what you’re investing in. Understand exactly what you’re buying. Know what to expect in good times. Know what to expect in bad times.
Get help! If you know people who are in the same business as the proposed purchase, talk with them. Talk to your friends and colleagues to see if any of them have any insight. Hop on Google and check out what others are saying about your potential deal.

Remember, some things look far better when you’re on solid ground than when you’re bouncing up and down and getting bumped around by a bunch of 5 year olds!