Commenting on a recent article, Carmine Red asked an excellent question:
How do you evaluate the financial advice you get from other sources? Specifically, how do you decide if some piece of advice is for you, or if you should discard some adjacent advice. Is there an amount of pick-and-choose?
GRS definitely doesn’t seem like a dogmatic 100% one-way-of-doing things site, so I’d love to hear about the critical thinking you employ, and that I’m sure we can all use a little of since we’re getting bombarded by financial “do this!” or “don’t do this” instructions from so many different dimensions.
Carmine is right: GRS is not dogmatic. From the start, my top admonition has been “do what works for you”. By this I mean that you should test financial advice to see if it works for you and your situation. There's little (if any) advice that applies to 100% of people in 100% of cases. Life is messy. Money is messy.
So, how can you decide whom to trust? How can you evaluate a piece of financial advice to decide whether it has merit? And if the financial advice does have merit, how can you tell if it's right for yor life?
Today, let's take a deep dive into this question. Let's explore how to evaluate all of the financial advice you get — from the internet, from television, and in real life.
How to Evaluate Financial Advice
Before I answer Carmine's question directly, I want to approach it obliquely. If you find this section boring, please skip to the next one. I won't hold it against you!
In 1940, Mortimer J. Adler published How to Read a Book, which contained 400 pages of advice on doing something that most people would argue needs no instruction. In 1967, he revised the book and turned it into a little masterpiece.
In the revised edition, Adler argues that there are four levels of reading:
- Elementary Reading. At this basic level, the reader is able to answer the question, “What does the sentence say?” But reading at this stage is a mechanical act.
- Inspectional Reading. At this level, a reader's aim is to get the most from a book (or article) in a minimum of time. “Inspectional reading is the art of skimming systematically,” Adler writes. Your aim is to get a surface understanding of the book, to answer the question, “What is this book about?”
- Analytical Reading. At this level, you're doing the best, most complete and thorough reading of a book that you can do. Inspectional reading is done quickly. Analytical reading is done without a time limit. Its aim is understanding. This is the sort of reading that most of us do most of the time.
- Synoptical reading. At the fourth (and highest) level of reading, we read comparatively. “When reading synoptically,” Adler says, “the reader reads many books, not just one, and places them in relation to one another.” My ongoing project to read about the history of retirement? That's synoptic reading.
What has this to do with evaluating financial advice? Well, I think similar principles apply. When you receive a piece of financial advice from somebody, or you read a recommendation online, there are four levels of evaluation.
- Elementary evaluation. When you pick up a piece of financial advice, start by asking yourself “What does this advice say?” You're not trying to judge its merits. You're merely trying to parse the recommendation. Believe it or not, you can throw some stuff out at this level because it doesn't say anything. Or what it says is nonsensical. (I don't mean nonsensical as in “I disagree with it”. I mean nonsensical as in it literally makes no sense.)
- Inspectional evaluation. Next ask, “What is this advice about? What is the overall message? What is its core argument?” You're not trying to understand nuance here. You're trying to get the main point. For instance, in Mr. Money Mustache's popular article “The Shockingly Simple Math Behind Early Retirement”, the core argument is “the more you save, the sooner you can retire”. The main point of the article you're reading right now is: “There are smart ways to evaluate financial advice. Here are a few.”
- Analytical evaluation. The biggest part of evaluating financial advice is taking time to analyze it, to examine the advice in detail, to really understand it. This usually means asking “why?” Why is the person giving this advice? What's their motivation and what does this advice aim to accomplish? (The rest of this article offers some tips for applying this step.)
- Synoptical evaluation. Lastly, if you're evaluating important advice (such as how much to spend on a house), you should make time to do some comparative evaluation. What do other people have to say? Why do they agree? Why do they disagree? How does this advice fit in to what you already know and what you're already doing?
Here at Get Rich Slowly, one of my primary aims is to “evaluate synoptically”. I don't want this site to be one-dimensional. When I write my articles, I try my best to draw from a variety of disciplines and sources. I look for differing opinions. Does that mean I stray from strict personal finance sometimes? Yes, absolutely. But it makes the writing more interesting for me and, I hope, for you.
Okay, that's some semi-helpful, high-level philosophical stuff about evaluating financial advice. Now let's look at how to put this into practice. How do you actually analyze financial advice to decide whether it's good or not?
I think it helps to ask four questions. [Read more…]