Wealth In Overdrive Podcast

Good Financial Advice vs Sounds Good Financial Advice - How To Tell The Difference

July 06, 2022 Hari Luker Episode 12
Wealth In Overdrive Podcast
Good Financial Advice vs Sounds Good Financial Advice - How To Tell The Difference
Show Notes Transcript

In the world of personal finance and financial advice. We have a new wave of financial experts given anybody can jump on social media and share their opinion. Due to this. You as the consumer need to be able to tell the difference between Good Financial Advice and Sounds Good Financial Advice. 

In this episode, join Hari Luker as he breaks down the basic concepts and what to listen ut for versus what you should run away from... Or simply just sit back and be entertained by the interwebs,

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*This video is for entertainment purposes only and is not financial or legal advice.

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Hey, this is Harry Luka. And welcome to another episode of the wealth and overdrive podcast in today's podcast. What we are gonna be going over is how do you decide for the difference between good advice and sounds good advice. Now this is going over the financial topic. So when you're sitting down and listening to someone, who's either Dave at the world of cooler or someone on the YouTubes or TikTok, or, you know, even a professional advisor, you know, how do you personally know if that is actual good advice?

Versus sounds good advice. Is there content and proof that can back these things up? And so in this one, we want to go through inaccurate and misleading information. now, I think we'll probably just jump straight into this, understanding that in this world, we are pretty much rife with misinformation and bad advice.

That's pretty much standard. And with all the social media platforms we have nowadays, everybody has a voice. Everyone has an opinion. But are they really in a position to offer that advice? Did it work great for them, but probably wouldn't for anybody else? It just seems like consumers are often too much more willing to listen to someone with a, you know, a compelling personality as wrong as he, or she may be than to someone who truly knows the facts on how to build, manage personal wealth.

so in your quest to build your wealth, you will be bombarded with misinformation, from newspapers, podcasts, magazines, eBooks books, television, radio, all types of marketing and advertising material that you pass every single day. Many famous financial writers have been responsible for millions of dollars lost by consumers while they continue to sell their, you know, eCourses CDs back in the day when you had like video tapes and, but still current today is also seminars.

Then other types of sponsored products, I E products they're required to sell to help them make a commission, but is it really the best product for us? The consumer. So even the best intended information might be misguided if it is incomplete and only promotes and advantages of a particular financial product while ignoring its disadvantages at the same time, same as when you go on TV and you hear about these medicines, Hey, this will fix this, but then that real quick text at the end, but side effects will be.

And I mean, if you actually listen to it, you're close to death. By the time you've taken a damn thing. So all too often, Financial profess professionals suggest that consumers invest in a particular financial product without knowing or thinking about how that product will actually fit into the individual's yours financial life.

Without being said, there is no financial product that can work alone to make, you know, someone's financial life run smoothly. The key is to find the right combination of financial products and use them as a complimentary fashion. So let's dig deeper and explore some reasons why. You will receive, let's say financial misinformation and even bad advice from the media and in the financial services arena itself.

It is important that you know, that the information you are reading or hearing is ill advised and can damage your financial wellbeing. So we have to ask ourselves, when does misinformation turn into bad advice? Cuz misinformation turns into bad advice at a point when a consumer acts on the information provided without verification or evaluat.

As to its merits itself. So how can you know the difference between bad voice and sound advice? I think that's gonna be a pretty good topic throughout this podcast. Actually, it's quite easy though, in many ways, cuz if you have the right evaluation tools, this is what can help make it a lot more easier.

But without the right gauges and measurement devices, which most people do not own the job of recognizing and selecting sound advice becomes difficult. So where do you start to get the proper education? You must start with basic knowledge about decision making primarily. So there are two types of decision making, decision making based on deductive reasoning and decision making based.

inductive reasoning. Now let's jump to the source real quick. There deductive reasoning may be simply defined as the ability to make a decision based on known facts that lead to its a specific conclusion. For example, if I have four oranges and I eat one, how many oranges do I have? The answer is obviously three.

If you got that wrong, we might need to go to a different podcast, but but what if I said I ate an orange? How many oranges do I. well, you could not know the answer because you do not know how many oranges there were in the first place. You could not deduce the answer unless you knew how many oranges there were to start with.

On the other hand, you use an inductive reasoning, um, which does not require a complete set of facts before you can come to a conclusion or a decision. So in making decisions, using inductive reasoning, You use facts you have and base your decision on the possibilities or alternative scenarios that can be derived from the known information, such words as insight perspective.

I think it was it sixth sense logic and some common sense. Come to mind when discussing inductive. Reasoning. Now you can draw from a variety of skills or instincts to come to a conclusion that you know, what to do. You not need a complete factual basis on your decision making as you do when making deductive reasonings themselves.

So. It is important to also note that both deductive and inductive reasoning skills are necessary in our lives. Sometimes we need proof that a deductive process. Um, other times we can make a decision based on inductive reasoning without proof, because we somehow know. the decision is correct. So when it comes to financial planning and structuring our financial lives, we need to use both types of reasoning.

However, most financial advisors today use only deductive reasoning, and that presents a major problem for us, the consumers. So this really starts narrowing it down to the main purpose of this podcast, cuz the use of deductive reasoning. By financial advisors is a major cause of misinformation that leads to bad advice.

For instance, let's say you are interested in a retirement plan, a financial advisor using only deductive reasoning may ask you a series of the following questions such as, at what age do you want to retire? How much income will you need at retirement? How long do you think you will need that income? And what is your risk tolerance?

I'm sure you've all heard or been asked those questions in the past, or maybe heard it from your parents depending at current age you are. But if these are the questions that you are asked, you are dealing with an advisor who. Uses only deductive reasoning and the, and the plan he designs for you is not likely to work.

He asks these questions in order to get a series of facts that are needed to use deductive reasoning to give you an easily quantifiable answer without your response to these questions, he would not be able to make the necessary mathematical calculations. To prove to you what plan to buy without your responses.

He would not know how to guide you or point you in the right direction. Only with these responses. Is he able to articulate a solution that gives something like this? If you need this much income at your retirement, and all you have is this much today, then you need to save and invest these dollars in our product right now.

So remember what you learned already is that money is not math and math is not money. Anyone using deductive reasoning analysis thinks that math and money are identical, but if we go back to the oranges, we can prove ourselves. That's not correct. You know, they rely on math to prove you with the answers and prove.

Um, or the viscosity of the plan itself, but no one can predict what will happen in the future, especially in the long or what variables or mathematical assumptions should we say? There should be. a plan designed from such logic is only good for one day at that moment at that table when you're having that discussion, cuz who knows what's gonna come tomorrow and that's about it every day after the first day, the plan is going off course.

How do you know when you'll retire? Does a 35 year old person really know for. That they will want to retire at the age 65, just cuz that's what everyone else does or talks about. We might change our minds and want to retire at 55. I mean, I think everyone would much rather retire 10 years earlier because it feels, you know, cuz you, the chances are at that point, you're gonna feel burned out or you're bored of your job or health reasons maybe slow you down.

So. Health may deteriorate and you may need to retire early because you're unable to work. Or on the other hand, you may decide at 65, the work is, you know, still very meaningful and you may want to work until you're 75 or even 85. If you can continue that kind of work and in good health, you can't really plan when, or if you are wanting to retire again, it's just a plan or a hope.

So, how do you know how much income you'll need at retirement? Again, such a wide open question. What method did you use to determine that amount? Was it based on today's standards or did it just sound good at the time? Remember that you now know. About the eroding factors and income taxes, lost opportunity, cost plan, obsolescence, technological change, inflation market inflation, you know, interest rates or interest charges, fluctuating interest rates.

All throughout this time, you may begin to see how difficult it really is to use deductive reasoning, to determine a sound financial plan for retirement. When these factors cannot be predicted of any accuracy, most likely whatever you think your income needs will be at retirement, they will likely be much higher.

Would you really want to limit yourself to a specified income based on today's assumptions, knowing that tomorrow's income needs will be a lot different. You never know if you're gonna get that new promotion. If your wife's gonna get much more high paying job, you know, you never know kind of what the debts and expenses you may get into.

There's so much that can change that at that point. Let's say you're 40 years old and is living an average life. Whatever could happen in five, 10 years time, you may change jobs. You may get a new promotion that could double your income, let's say, and all of a sudden your living standards completely change and you're running outta time to keep up for that retirement plan.

It's gonna help keep you at that income, um, or lifestyle that you may change for yourself. So how are you supposed to answer the following question? How long will you need your income during your retirement years? Do you just take a life expectancy chart and just take a willing guess? What if you lived with one oh, a hundred and five currently as I'm, you know, recording this podcast?

My granddad is 103. What do you plan to work or do you simply fold up your tent and staff because you ran out of money? I mean, what about your children? Did they spend their money to take care of you? What is going to happen? You just don't know it's good to get a base and it's good to get something started, but people have to understand these questions can say change so drastically and you should not hang on the answers that you provide early on.

And the later it gets you, can't just simply up it or change it to catch up. If it's not where you think you're going in the right direction, there's ever changing variables. So will the mathematical variables use to create deductive reasoning type financial plans stay consistent in order for you to reach your goal, meet your need, or hit your target of.

Not. So why pretend from the beginning that the assumptions used in the plan have any merit at all whatsoever when you see or read financial planning advice that uses interest rates, investments, rates, income tax rates. Let's think about it. Um, inflation rate along with a timetable for the plan itself.

You now know. That these assumptions are certain to change. And so two will the outcome of the plan. But the big question you have to answer is if these variables are going to change, then why would someone consider it to be a viable plan in the first place, man? I mean that, that's just a huge question right there.

Each year, the plan will become more, let's say outmoded and by the end result will. Far off the mark, the excuse I hear most of the advisors who use this type of deductive reasoning planning is that they will review and update the plan and recalculate using, you know, let's say then, then current assumptions.

in effect. They're admitting that the first plan was just simply off target and that each and every other yearly plan will be off target as well. You know, they have to keep readjusting the plan to keep it supposedly on course field. Next review. The problem is that the plan will not be able to be readjusted because at that time, you know, that is being lost each and every year.

So every single year you are losing. Compounding effect that you could have started right. In the first place. Is it much more difficult to adjust a plan in the short run than the long run and have it succeed? So for example, say you are now 60 and the plan is on course, what happens in the next couple of years?

If the rates drops, you know, far below the, you know, the assumptions. Used for the retirement income when you were first asked these questions, or let's say the stack market declines and the income tax rates double, and you get sued or inflation is roaring away with double digits, kind of like right now, as I record this podcast, you only have.

Four years left to update and review the plan. And it will be almost impossible if you'd be able to readjust and plan to meet your needs in only a short window of opportunity. So can you just, I mean, just look at it this way. Can you imagine NASA shooting a rocket to the moan, knowing that the path is wrong and having to keep readjusting the path, keep the rocket on target.

NA would never. Plan a mission, the way financial advisors plan for the public NASA maps out a successful course, and they made many, many backup systems and built in redundancies for better, you know, assurance and success for the mission itself. See financial planners do not use backup systems or built in redundancies to make sure that you will overcome the constantly changing a road in factors.

deductive reasoning type plans and the update and review strategy just won't work. You are either going to run outta time or run outta money since time is one of the most is one of the biggest variables used in building any type of plan. The plan becomes harder. And harder to achieve as people get older.

And the variables like a market decline occurs between reviews. Many people know that in their fifties or sixties have retirement savings that have been disseminated by the market declined, especially going through 2000 and 2003. Now because of the short time left until their planned retirement, their.

Can't be fixed. And today they're in financial trouble. You may not have lived through that. Even back in 2008, you may have been young. You may have been a child. You may not have had your retirement account substantial enough that you are so close to having to take withdrawals from it, you know, about these years and what happens, but you didn't actually live it.

Go ask your grandparents. Money fortune and Forbes magazines, all ran articles in 2002 and 2003 on how people were, uh, were unable to retire. Even though they had a financial plan designed by a licensed financial planner, instead of blaming the financial planning theory, it was the stock market that got the blame, some financial planners state.

They could have imagined that the stock market would go down that much. From 2002 to 2003 all at once we assume for losses, but we never planned for them in many cases. Again, hope for the best plan for the worst, the public took their medicine, went along with their feasible excuses and went along it with the financial planning theory that caused their misery and not the stock market.

So sound planning theory would not let that happen. If you read the articles back then the planners quoted that these articles suggested that these folks sounded. Now should either lower their standard of live reliving, reduce their income targets for retirement, move to a cheaper city town, state, or Providence, and work five years longer than desired, or invest more money into the stock market.

So when it comes back, they will be able to retire. And the people who follow that advice are still waiting. Just think about that. It's one of those things when it always comes down to restricting yourself, To get you where you want to be. It's always about cutting back, moving somewhere, cheaper, driving a cheaper car.

You know, it, it's always about restricting and people aren't allowed to dream about really what they can be doing in the future. So in summary, deductive reasoning type planning has much. Inefficiency and has a little chance of helping people succeed in meeting their financial potential and financial success.

That's why we have the importance of inductive reasoning, inductive reasoning based planning works on the assumption that no one can predict the future or can control the interest rates, the tax rates, the market rates, the loan rates, the inflation rates, et cetera, all that is certain about the future is that is gonna be very different.

From today, these are inductive thoughts. All the economic values in the future will be changing. And out of your control, the stock market might go down for several years in a row just before. You're about to retire income tax regs may go up substantially as the baby boomer generations retires. In your retirement savings may not be available to you when you want to retire because the government might change minimum distribution.

As some legislators are truly suggesting right now. So will your plan hold up to any set of circumstances as when NASA sends a man to the moon, all contingencies must be planned and every viable, expected to change the plan must have built in redundancies and a fail safe system. These thoughts will help you prepare for.

Financial future and so important to remember. So let's break it down to even more day by day living. Think about it. You don't wear a seatbelt in your car every day because you think you're gonna crash. You wear it just in case you do the same thinking must be incorporated into all of your money decisions.

You hope nothing ever happens. But if it does, you need a plan that will work under that scenario or any scenario again, I repeat hope for the best. But plan for the worst inductive planning looks into the future with new eyes and with optimism, deductive planning uses past performance and product averages, rates of returns, average past inflation rates and average market conditions.

The future is not a mirror of the past, but rather a magic carpet ride of hope. And aspirations, your financial plan should not be based on past performance or limitations as to your anticipated needs. You should have your money reaching your maximum performance, maximum efficiency and active, maximum effective results that protect against the many, many, many eroding factors in all of the unknowns.

A lot of times, you'll see in our presentations, we'll draw a straight line and this is what some people represent as life. You go from a, to B in a straight line. That's what these many planners are expecting when they write out your financial plan. But if you really look at it, It's almost going up and down.

Like your life kind of goes up and down on a graph, similar to the stock market. You know, you get a job promotion, there's a death in the family. All of a sudden you get a raise, then all of a sudden there's some funeral costs. You get sued. There's a car crash, medical history, medical issues. Life is never the same every other day.

And that is why you always have to plan for that. Inductive planning does not limit your financial planning. Potential, sorry to only meeting your anticipated needs. It allows you an increased standard of living so that your wants and desires can be achieved as well. And any time I tell this to people, it's all of a sudden the smoke goes up in the eyes.

The disbelief sets in people can't believe that this is actually possible. Listen, there are two possible roads you can take. One road limits you to the set of predesigned needs, goals, or targets and hopes. That the variables don't change too much over time. The other road is to build a plan that seeks to maximize the performance of your income and your assets, and to maximize your opportunity to surpass those needs goals, targets, we're protecting you from the eroding factors.

The choice is obvious. Most people take the second choice. They just don't know that such a choice is available to them. Now we're gonna just kinda look at good advice real quick. And so how can you recognize good advice and sound information first understand that every financial product has advantages and disadvantages?

No one product can do it all. And no one product has all the positive features. If the information you receive about a product, just touts the product's advantages. And there is not a complete and thorough explanation of disadvantages, you know, that you are being given incomplete information and possibly bad advice.

Anyone can make something sound good by telling you one side of the story, but it takes two sides of the story to fully understand the product or service you are considering for your financial. Remember it is the enhancement of a financial products advantages and the elimination or reduction of the disadvantages that ultimately make for a sound and successful financial strategy.

What good is it to have a financial plan that doesn't compensate for the disadvantages of the financial products used to fulfill your goals and plans? The key to financial success is not to have money in one financial product for co you know, for college education or money in one financial product for retirement, and then other money for estate planning.

This financial planning concept of having each dollar work separately is one of the core reasons for financial failure. For many, many, many people, money needs to work in. You need to develop a holistic view of your financial life with all your assets working like a sympathy orchestra, rather than a one man band, your assets and money should all be coordinated and integrated to formulate one offensive and offensive plan.

Many times you'll hear defense wins. Games is huge money should be flowing from one financial product to another, in a strategic manner that yields higher returns, low risk and more protection for you. Keeping your money isolated in financial products to compound or grow is inefficient and ineffective.

Single of financial product planning for each need goal or target can result in a loss or overall wealth potential. So just to recap, everything we went over is financial misinformation provided by the media is all over the place. You've got financial assumptions used by planning cannot be controlled or predicted a sound financial plan takes into consideration.

Both deductive. And inductive reasoning and every financial product has its advantages and disadvantages. And the most important thing is you need to know both. Now. I know I kind of got on the high horse on this one, but it's one of those things that through the years, you kind of look back, especially when you understand the industry, what you've been told, what we see every day, you turn on, you know, the news in the morning and you've got someone yacking on about this and that and the stock, or you're going through social media.

And these people kind of pop up with this one strategy that made this much money overnight, and it's got a million likes and you're just thinking, man. there is so much misinformation. We're just all about the next hot topic and the next hot investment and the next hot asset that we never really break down about how our own personal draw of finances.

You know, we always like to class it in, in our office as a financial junk draw, you open up that draw and all of a sudden you've got a 401k, you've got a Robin hood account where you put $10 a week in and hopefully invest it correctly while the extra change goes into your checking or savings account through the invest.

At the same time you've then got, you know, you've got your Vanguard account, you've got your Roth IRA because you're all jacked up about that tax free money. Now you've got these investments here and there and it's just all over the place. And that's, before you even start thinking about real estate investing that you have absolutely no idea about when it comes to real estate and then actually even more so how to benefit from the taxes.

It's all about getting your financial life coordinated into financial draws so that, you know, when it's time to make a financial decision, how and where and what your money is working for, where it's gonna end up and you can predict what certain stages of your life you're gonna have available to you, that you'll be able to withdraw from what your taxes are gonna be like.

If you even have to pay taxes. And I think that's what really comes down to the core of this is dis you know, kind of breaking up the difference between good advice and sounds good advice, guys. I appreciate you hanging in with me on this one. This is one of our slightly longer podcasts, but again, like I told you, I've gone on a bit of a round there, but I've got a lot of passion for this stuff.

So please, if you took any value away from this, like share comment down below, if you feel this can provide value to a family friend or a. Please pass it on so we can put this great information in front of others at the same time. Again, this is Harry Luca. I appreciate you spending time with me today on the wealth and overdrive podcast, and we will catch you in the next episode.