Do you remember Hans Christian Anderson’s classic tale, “The Emperor’s New Clothes”? It is the story of two tailors who promise to create a glorious (and expensive) suit for their emperor, though it will only be visible to those who are worthy. On the emperor’s first outing in this supposedly dandy new outfit, throngs of people “oooh” and “aaah.” But, suddenly, from the mouth of a babe, comes the naked truth, “But he isn’t wearing any clothes!” What does this have to do with your money? A lot.
Here are the three important ways that investing is just like “The Emperor’s New Clothes”:
1. Millions of Investors Are Financially Naked
The dirty little secret of cocktail parties across America is that many people who talk as though they have a solid grasp of the world of investments... do not. The complexity of the financial landscape in America has increased geometrically over the past few decades, and yet personal finance education has not kept pace. We’re left to figure it out on our own, and millions of people are downright confused. As a former portfolio manager, I am consistently amazed at how many conversations I overhear about investing that sound like two people speaking gibberish at each other.
2. Few Dare Speak the Truth
On top of this, most people are embarrassed to admit they find investing confusing. There is plenty of societal support for saying you don’t know whether it’s worth it to eat organic or not. However, when was the last time you felt truly comfortable saying to a good friend, “Investing confuses the heck out of me, and I’m really not sure if I’m doing it right”? Admitting feeling overwhelmed by investing is right up there in social taboo land with saying what you really think about your boss... to her face.
3. People Assume Others Are Seeing Clearly
In “The Emperor’s New Clothes” everyone along the parade route saw the same thing... a nude man. Yet, they didn’t speak up because they thought others knew better, that they were “worthy” and saw the magical suit. It’s the same with investing. Just because your parents, boyfriend, neighbor or coworker sounds like he knows what he’s talking about, doesn’t make it so. If you are feeling confused by what you are hearing during a conversation about investing, the odds are very high that people around you—as well as the person speaking—is confused, too. The wisest investors are not afraid to ask questions, express doubt, and shout out what they really see. Follow their lead, and your financial life will have a happy ending.