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Straight Story: Societal pressure

Marketplace Staff May 25, 2007
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Straight Story: Societal pressure

Marketplace Staff May 25, 2007
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TESS VIGELAND: It’s time once again for our economics editor, Chris Farrell, to help you sort out what’s smart, what’s stupid, and what’s the straight story. Hey, Chris.

CHRIS FARRELL: How are you doing?

VIGELAND:
We’re doing well. And, you know what? In our editorial meeting this week, you brought up a book that you recently read called How Doctors Think.

FARRELL:
That’s right. And it’s by Jerome Groopman. He’s a physician at Harvard Medical School and he’s awesome, a writer for The New Yorker.

VIGELAND:
All right. Well, it sounds like you’re very widely read, but I’m very curious how you’re going to relate this book to our personal finance show.

FARRELL:
Well, Tess, I mentioned the book because of a relevant reaction that I had to it for personal finance. Let me explain. You know, Groopman is passionate for patients to be smart consumers when they’re dealing with the medical profession.

VIGELAND:
Do your homework before you walk in the clinic door.

FARRELL:
Yes. Now, how many times do we say that when it comes to personal financing?

VIGELAND:
Absolutely.

FARRELL:
And you know, Tess, I was absolutely exhausted when I put the book down. And I think about it, society expects so much of us as consumers. We’re ought to be savvy when it comes to our health care, smart 401 (K) investors, engaged parents, and I could on and on. So here’s the Straight Story. The demands society is placing on the modern consumer are overwhelming. That’s why when it comes to managing money, my advice is always keep it simple.

VIGELAND:
Yeah, you know what, how much do all of us have, really, to do all of this research to be informed consumers? Isn’t that why we pay doctors and brokers?

FARRELL:
That’s right. But here’s the thing, particularly, brokers love to give you mambo jumbo. You know, there’s a secret world. It’s called Wall Street. And they’ll talk about, now, in your portfolio, do you want alpha, Tess, or do you want beta? You’re, you can get lost in this world. And that’s why I say, for most people, what makes the most sense is to keep it very simple, buy index funds, buy this target or lifestyle funds that we talk a lot about, which are essentially closet index funds that adjust for risk over your life span. Turn off all this discussion about this complicated strategies that line the pocket of the middleman and not yours.

VIGELAND:
But shouldn’t we still really be doing our homework at least, at some level, should we be reading annual reports? Should we be paying attention to earnings?

FARRELL:
You know, as a citizen of our society, an active participant in our economy, I’m gonna say, yes, you should be paying attention to earnings and what’s happening. I wouldn’t read annual reports. We have a couple of books that we talk about and recommend, you know, listening to the show. I mean, there are things you want to stay up on. So I’m not arguing for ignorance. I’m not arguing for nihilism that none of these matters. But what I am saying is, you know, there comes a point where we actually do know how to construct a well-diversified portfolio. Once you’ve done that, go off and volunteer in your community. Spend your time with your family. Do some of the activities you love.

VIGELAND:
But aren’t we actually being asked to do more and more? I’ll use the word homework again. I mean, you have, you know, new products like health savings accounts, and some politician is suggesting that we should all eventually be managing our own Social Security accounts.

FARRELL:
You’re absolutely right. And this is really a worrisome trend. It used to be, you work for a company and you have a pension. It would be – we call it defined benefit plans.

VIGELAND:
Right.

FARRELL:
So you’d work so many years and then you get a benefit. Now, today…

VIGELAND:
And you don’t really have to think about it.

FARRELL:
You don’t have to think about it. A professional, who is paid, would figure out how much goes in stocks, how much goes in the bonds, you know, the whole asset allocation. Today, you’re your own pension fund manager. And there is no way around it, in your 403 (B), your 401 (K). You’ve actually raised a very important point with these health savings accounts. In theory, health savings accounts make a lot of sense. You’re protected from catastrophe, you have more of your financial skin in the game, and you know, you’re gonna be making some judgments.

FARRELL:
And my reaction is, when are you gonna have time to do this? I mean, more and more, we’re asking of the consumer too much. It makes sense when you’re talking about healthcare. It makes sense when you’re talking about retirement savings. But you take the whole thing and we need greater simplification. And that’s why, I think, the health savings accounts will never take off.

VIGELAND:
All right. The Straight Story from our man, Chris Farrell. Chris, we’re always keeping it simple salary, aren’t we?

FARRELL:
We are. You know, I like that.

VIGELAND:
Thanks.

FARRELL:
Thank you.

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