3 Financially Foolish Tips for April 1st
March 29, 2012In honor of April Fool’s day coming up, here are some financially foolish tips that you can give on Sunday:
1) You have to buy (fill in the blank) because it’s on sale!
We write a lot in this blog about ways to save money by buying things on sale, using coupons, etc. But this all assumes that you were going to buy the product anyway. If you’re buying something that you wouldn’t normally buy just because it’s cheap or on sale, you’re not really saving any money. In fact, if you’re going to spend a lot of money, you’re better off paying more for something you really want. Otherwise, you’re just trading cash for more clutter. Remember, it’s about value not just price.
2) You have to buy the new iPad (or whatever is the latest tech gadget) because everyone else is buying it!
Personally, I don’t get the appeal of the iPad. Yes, I admit it’s “magical” and fun to play with. But between my Android smartphone and my laptop, I just can’t see where it would actually fit into my life. It would be one thing if it could replace one of those items but it’s too big for me to carry around everywhere like my phone (and it can’t take phone calls or text messages) and it’s not functional enough to fully replace my laptop. The last thing I need is to carry around my laptop plus an iPad every time I go through airport security (which is quite often in this job).
Now that I’ve gotten that off my chest, this isn’t really about the iPad per se. There are lots of people who swear by it (including our CEO) and maybe it’s the future of computing and I’m just behind the times. (When it can replace my laptop, I’ll be all for it.) It’s really about always needing to have the latest and greatest tech gadget.
Technology is actually the area where this mentality makes the least sense. For one thing, tech prices tend to fall faster than almost anything else so you’re rewarded more for waiting. Second, there are often unexpected problems that develop with new gadgets. Remember, that whole “grip of death” problem with the iPhone 4? (Sorry, I just love picking on Apple.) Well, why not let other people pay extra to be the guinea pigs?
This also isn’t to say that you should never buy the latest gadget. Some people obviously get a bigger kick out of that then I do and if they’re willing to pay that price, so be it. (There are also others who I think go too far the other way and like to brag about how they don’t have a smartphone or even any type of cell phone.) The real point is to not buy something just because it’s the current craze. Instead, think about whether you can wait and whether it’s even really worth it to you at all.
3) You should buy (fill in with an investment) because the market is going to go (up or down)!
Let’s just get one thing straight. No one knows what the market is going to do, much less whoever gave you that advice. There’s lots of money hiring the smartest people to use the most sophisticated supercomputers to try to crack that code. If someone could accurately and consistently (that whole broken clock being right twice a day thing applies to investing too) predict the market, they would have beaten out Warren Buffett as the world’s most successful investor by now since even the Oracle of Omaha doesn’t have such a track record. Instead, Buffett buys companies that he sees as overvalued and patiently waits for their prices to eventually rise to their proper value.
So what really happens when someone follows this tip? Sometimes they end up paying a fee for advice of dubious value. For example, I heard about investment newsletter writers who send two opposite investment predictions to two different mailing lists of people for free. They then drop the names of the people who got the wrong prediction, split the other group into two, and send two more opposite predictions to each group. They repeat this process until they have a group of people who’ve received nothing but a long string of remarkably accurate predictions before they happened. How much do you think those people would be willing to pay that newsletter writer for the next prediction? I’m not saying that all investment newsletter writers or other financial “gurus” are this bad but it’s often just a question of degree.
The other thing that happens is that people tend to follow the herd and buy investments when they’re already relatively high. Think about dot com stocks in the late 90s and real estate after that and you can start to see what the problem is with this approach. Buying things just because everyone else is makes as little sense when it comes to investing as it does when it comes to gadgets and other consumer products.
But what if you’re right about the market and you make a lot of money? This can actually make things much worse by inflating your confidence, which only encourages you to take bigger risks next time. Unfortunately, your luck can only run for so long and it’s likely to run out just when you’ve taken the biggest risks.
As you can see, these tips can be more financially damaging than the typical April Fool’s prank so be sure to tell your victim that you were just kidding. Otherwise, they’ll probably think you were serious. That’s because unfortunately, these are tips that people actually give every day, not just on April 1st.