How to Make Good Investment Choices

Interview with Paul Merriman

Author Paul Merriman discusses financial literacy. Find out how to make objective investment decisions that are not based on emotions. What are the best sources of financial information, and how do you find a financial advisor that you can trust?

Douglas Goldstein: Paul Merriman is very well-known for teaching financial literacy through books, speeches, blogs and podcasts. He recently wrote a great article on Market Watch called The 10 Toughest Investment Decisions.

What are the ten toughest investment decisions?

Paul Merriman: I do think that the most difficult decision is finding that source of information that you can trust. It can be a huge mistake, often colored by kind of a feeling for somebody you think you can trust. You may have a sense that this person is working in your best interest but unfortunately in many cases, people are not and you trust the wrong source of information. You likely could invest wrong for the rest of your life. It could turn out to be a disaster.

Douglas Goldstein: One of the ways that people try to avoid this problem, of course, is rather than getting help, they rely on themselves which also sometimes is a problem. They’ll make mistakes or they don’t even know what they’re doing. They just kind of paddle along and use hope as a management technique. Is that something you found also?

Paul Merriman: Absolutely – and in fact as you know from having interviewed experts in the area of behavioural finance, we’re over confident. We think we know more than we know. We think we make more than we make and we talk to our friends like we understand the investing process but in fact, most people are not being the best that they can be. And I believe that literally every investor should spend some time in his life getting professional help. I’m not here to sell any services for anybody but I know virtually every person can probably do better even if he or she only uses that professional for a few hours. The professionals know better than the amateurs and at the end of the day, that can make a difference of half to one percent a year in return and that’s big over time.

What Are the Mistakes People Make When Trying on Their Own?

Douglas Goldstein: What are some big mistakes that people make when they’re trying on their own?

Paul Merriman: I think that the biggest hurdles that we have tend to be the emotional hurdles. When I started in this business 50 years ago, it was a terrible business. Commissions were out of sight and they were regulated to make it [killing] for the sales person and not for the investor. Loads were eight and a half percent. There’s lot of stuff that did not work in the investor’s best interest and I suspect that most investors who started in this business when I started back in the ‘60s have given away at least one percent a year to the inefficiencies. That’s the way that the market worked back then. Now today, I think it’s different. I think because of the work of the academics and others who truly do care about the individual investor or how investing works in the best interest of that individual investor, they’ve made this process pretty simple. What’s left to deal with are the individual’s own emotions. And, if you can’t overcome those emotions, I don’t know that you’re going to be a successful investor because there’s somebody always trying to get you to do something different than what you’re supposed to do. That’s the way the business works. If we can’t talk you out of selling what you have and buying what we have to sell, how do we make a living? Most people are not prepared.

Douglas Goldstein: You’re talking about people trying to not make emotional decisions. None of us is a Mr. Spock. We can’t just do everything based on pure logic and the fact is we’re all aware that when we make a decision whether it’s a buy or a sell, it’s going to have an impact on our real life or on paying for our kid’s education, or our retirement. There’s a lot of emotional baggage there and I don’t think you can just say ignore it so you can make a black and white logical decision. So how can you train someone to be able to make an intelligent decision understanding that she or he also has real emotions and real fears?

Paul Merriman: I think it’s a partnership. I think it’s a partnership in terms of understanding who you are as an investor, what you need to achieve, what risk you’re willing to accept to achieve that rate of return. You match that knowledge with the knowledge of how investing works and you do in fact, I think, take most of the emotion out of the process. I wrote a book, a free e-book, called 101 Investment Decisions Guaranteed to Change your Financial Future. All I did in that book was look at 100 decisions or 101 that we make and look at it through the eyes of what would be the best practice and when we can boil this down or break it down to simple decisions. I teach it to high school kids and they get it, then we do eliminate most of those emotions and you’re right. The decisions we make do change our lives but what we have to be careful is not to have fear and greed taking over our decision making process and that just happens way too often.

Douglas Goldstein: It’s my feeling that the schools spend way too much time teaching things that the kids don’t care about and will never use rather than real practical things like “She’s better off to get a 15 or 30-year mortgage and how do I determine which credit card is better or whether I should even have a credit card at all?” How do you connect with the kids who are being pressured literally from the time they are in high school to make wise decisions when their own parents are probably messing themselves up?

How Do You Teach Financial Literacy to Kids in High School?

Paul Merriman: Unfortunately, and I defer to the experience of a friend of mine, Dr. Lewis Mandell, who has focused on financial literacy most of his career as a professor. What they found in the studies he was involved with is that the young people at the high school level don’t likely get it or retain it because it isn’t part of their day to day life. Now, I sponsor and underwrite a university course basically for seniors in college with the idea that there they are right on the cusp of coming out of the university having to face the decision about what to do with their 401 (k) and a lot of other decisions you’re talking about. That is the point that I think we’ve got them to begin to focus. We’ve got them emotionally. We paint the picture of what retirement could look like at 65 instead of 95 as it maybe or will be for some people in 40 years. And I think we’ve got to get to students at that point when they are ready to move to action.

Douglas Goldstein: I think about people, too, when they will be old. Some are making college decisions and saying, “Should I dig myself $100,000 in debt to get a degree that won’t lead to a high paying job?” I don’t know. Maybe I’m more optimistic about high school students. I got a couple myself. I think that they could learn about it. My daughter – when she was in high school a few years ago, said that someone spoke about a check book and not a single girl in the class – except my daughter – even knew what the model was behind check books. I feel that we protect our children from the dirty world of finance instead of teaching them – this is a job, this is how you work, this is how you save, this is how you give charity, this is how you invest. Some of our kids know differential calculus and yet they don’t even know the difference between a stock and a bond.

Paul Merriman: I think you kind of broke the code there when you mention the fact that your daughter, the daughter of somebody who is in the financial industry, taught her about that. That’s what the studies show. At that age, the big impact on learning is the mentor. And often the mentor is at home. That’s often where learning is established, not from the teachers. So again I think it’s going to happen – maybe a little bit later – but wouldn’t it be wonderful if more kids had a mentor like you?

Douglas Goldstein: How can people follow you and follow your work?

Paul Merriman: www.paulmerriman.com is where the free books are available; there are three of them. I have an article every week that I write for www.marketwatch.com. I do a podcast every week and I’m just looking for ways to help people do more with their money. All of it is available at www.paulmerriman.com.