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Understanding Financial Porn

by Ouida on September 21, 2010


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I first came across the term, financial porn, about a year ago. A friend sent me the article The Best Financial Advice You’ll Never Get while doing additional research after reading that article, I ran across the term financial porn then its cousin, investment porn.  I was shocked, honestly.  When I first became interested in financial literacy, I purchased all of the recommended magazines, Money, Smart Money and Kiplinger’s Personal Finance.  I also joined every financial newsletter that I could, subscribed to the Wall Street Journal and Investor’s Business Daily and the Motley Fool.  I also joined the Association of Individual Investors.  Little did I know, the Big Three:  Kipplinger’s, Money and Smart Money have been labeled the top purveyors of financial porn.

Financial Porn Defined:

A slang term used to describe sensationalist reports of financial news and products causing irrational buying that can be detrimental to investors’ financial health. Short-term focus by the media on a financial topic can create excitement that does little to help investors make smart, long-term financial decisions, and in many cases clouds investors’ decision-making ability.

Investment Porn Defined:

Investment porn is therefore material which is exciting and makes you think you’re getting inside information, an inside track and a chance to do well in the markets ahead of everyone else. But it’s basically public information, so you’re deluding yourself if you think this kind of data is really going to give you an advantage.

*****

With the publication of Rich Dad, Poor Dad, Robert Kiyosaki warned of a coming financial disaster and urged everyone to gain financial education;  it is tough to understand that when you are subscribing to the most popular financial publications around that you are probably not getting educated, but rather titillated.  I am grateful today that my 401K has only offered bonds and index funds.  Given the information overload to which I subjected myself a decade ago and the constant media messages that I was only a few hot stock or mutual fund choices away from “real wealth”, I would have traded my life savings away.

The financial publication that meant the most to me was published by the now defunct Hume Group.  This publication was a monthly newsletter that covered topics like amortization tables and how to calculate simple interest.  Boring stuff I know, but if you have ever bought anything on time you have dealt with those two topics and not understanding them can all but ruin your life.

About 3 years after I subscribed to the “Big Three” financial publications I began to cancel the subscriptions.  Money, Smart Money and Kiplinger’s really didn’t bring me financial peace.  I felt pressure to pick the next great stock when the latest edition of those magazines arrived in the mail, I could not abide by the sense of discomfort I felt at not taking the actions they recommended and I could never understand how a group of journalists could put together a group of articles about investing when they, themselves were likely not investors apart from their company-sponsored plans.  About two years ago, on a Business Week podcast about credit, credit scores and debt, the correspondent being interviewed about the cover story she wrote confessed that she 1) didn’t know what her credit score was 2) held no investments outside of her company-sponsored and 529 plans 3) had some cash that had been gifted to her and decided to plow that into her child’s 529 plan.  This was her recommendation for what to do with additional cash. Her 529 plan and her company-sponsored plans where her idea of investing.  Additionally she considered her dollar cost averaging by making monthly contributions into those plans investing.  This podcast aired in October 2008.  Anyone doing what she did would lose an additional 1/3 of their portfolio between October 2008 and March 2009.  I wish she would have told people to make sure they had a gooooood cash cushion and then deleverage, but she didn’t.

Financial writer Jane Bryant Quinn has been credited with coining the term Financial Porn in the 1990’s, she has this to say about financial reporting by journalists:  “I was getting at the newspapers and magazines that make investing sound easy. “Three ways to double your money.” “Ten hot stocks.” The articles that make it sound like the journalist knows the right stocks or mutual funds to buy. And the fact is we don’t know. Journalists don’t have any business pretending they’re investment analysts. We can talk about stocks, investment ideas and what people are saying. But journalists shouldn’t say that certain stocks will increase in value. Nobody knows. Soft-core though, the Net is hard-core.”

Get a load of this article title from CNNMoney: 6-Figure Jobs, No Degree Needed.  You see that and what do you think?  The title is structured simply to get you to read it.  When you do you find that to earn six figures you probably will need a college degree because the competition to make that kind of income  is so stiff and it takes 30 years in the jobs profiled to earn six-figures.  Humm.

What do you have to do to protect yourself from financial porn? 1) get educated by reading books and the occasional financial position paper. I always urge people to “get educated” on this blog and I suppose it is a bit boring but if the general public really understood financial principles like income to debt ratios and financial tools like variable rate, interest only and negative amortization mortgages, the impact of the mortgage collapse would have been significantly limited 2) re-evaluate what you learn by tracking your numbers, your investment returns.  Read books by people who actually invest, Swenson and  Bernstein are examples of well-respected investors who write in a lucid and coherent manner.  The book, Your Money or Your Life does a great job of helping you define your priorities and what money means to you before you begin investing.  Understand that you will read some duds.  Books by David Bach will never help you gain wealth but they will help you kick your latte habit.  3) understanding that you will never get rich running after the next stock tip 4) understand that sound financial principles pave the way to wealth and living well below your means is financial principle number one.

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