by Craig Floyd
During a recent vacation some of the entertainment that I experienced was that of a magician. This magician no longer wanted to be called a magician, he wanted to be called an illusionist. He wanted to make clear to us that there really isn’t magic but the ability to present an illusion in such a way that the audience didn’t understand or couldn’t see what had happened. By doing so, we call it magic. You and I just are not able to explain what took place or how it happened and so it has to be magic.
Well this fascinated me and this illusionist as part of his business actually sold some of his gimmick tools to do the illusions and instructions on a DVD how to perform the magic or the illusion with the tool.
After 30 years in the financial services industry it is my experience that in essence most Americans are under the illusion of how money works. Most of us understand that if we put in a given amount of time and charge for that time we will receive a given amount of money. Some of us exchange goods that we have either created or obtained at a discount. But much of our understanding of money is taught to us by those who profit from controlling our money.
We live in a complex world and a complex society. Many things about money are just too hard and too time-consuming to completely understand. So we turn that control of money over to institutions such as banks, mortgage brokers, security brokers, financial planners, CPAs and yes even our governments. This begs the question, “who are they most worried about?” and “am I seeing the whole truth about my financial environment?” “Are there money illusions that we don’t understand?
Let me give some examples. A popular radio talk show host, Dave Ramsey, often tells his listeners that they are able to receive a 12 percent return on money invested in the stock market. I and others in the financial services business have looked and searched and we can’t find funds that actually give these returns year after year. In fact the average rates of return really don’t tell the actual rate of return. Why is this? Simply said average is taking the returns over many years and dividing it by the number of years while the actual return has to overcome the negative influence of down markets. If a market loses 10% of its value it takes more than 10% to bring it back to where it was before the loss. And so the illusion of a 12% return.
Another factor not talked about in that return is the management fees. Regardless of the way a mutual fund or some other security is spun, there are always management fees. The company that manages that money has to make money themselves and a close examination of your account statements maybe even reading the small print will eventually show that they are charging to manage your money. In a lifetime of just 1 to 2% management fees you will lose a fortune. A costly illusion!
Another illusion will be the effect of taxes throughout the lifetime of both saving and dispersing your money. You see, the government cannot participate directly in the stock markets or mutual funds but they don’t have to. They let you participate in what are called qualified plans, like 401(k)s and IRAs. Most of us forget that they share in the ownership of that plan and when you or your beneficiaries take money from that plan the IRS is there with his hands out to take their part of that money. We think we’re getting a great tax deal by not paying taxes now on money that goes into these plans but the illusion is we don’t realize that more than likely you will pay more taxes than you ever saved.
So how do we find and understand the whole truth about money? Well it takes time, it takes trust, it takes study and it might just be that we have to change the way we see money. With some practice I’ve got so I can do some of the tricks that the magician sold to me. I drive my grandchildren crazy showing them and practicing in front of them. But really whether we understand the magic trick/ illusion or not isn’t that important in the scheme of life but not understanding the illusion of money and how it works could cost tens of thousands of dollars and much comfort in our lives.