Thursday, October 15, 2009

FEAR - the least useful emotion

Want to sell a product or service?  Crank up the FEAR!

In financial planning, two phrases come to mind involving fear:
"We have nothing to fear except fear itself"
"Fear and Greed are the two forces which drive the market"
The former, of course is the famous quote by Franklin Delano Roosevelt during the depth of the great depression. Fear and panic had gripped the public, and this fear was preventing people from making sound economic decisions.

The latter quote illustrates how people can destroy their own investment portfolios, by responding to emotions rather than intellect, buying stocks when they are high (greed) and dumping them when they are low (fear).

Fear is a natural instinct, and we all have it. We'd all like to think that we'd be the ones to respond well under pressure - that if faced with a life-and-death situation, we'd be the ones who took the imitative and took action to save the day. But in reality, in many life-and-death situations, many of us freeze, or even soil ourselves. More than 3/4 of the soldiers in battle in World War II never fired their weapons. Many were paralyzed by fear. The idea of being John Wayne, taking out the machine gun nest with two blazing pistols and hand grenade pins in our teeth is, for most of us, an utter fantasy.

I've been in only one stressful situation like that in my life, and it was enough to make me realize that I am not John Wayne by any stretch of the imagination. I know my limitations in that regard.

But when it comes to personal economics and financial planning, the fear involved is not that experienced by soldiers in battle or by a victim during a robbery. Financial events happen slowly enough that there are no sudden actions or crises most of the time.

Yet fear paralyzes many of us into inaction, or into taking unnecessarily timid actions. We fail to act, and when we do act, we act in the wrong ways, or too little or too late.

As I noted in a previous entry, during the recent downturn, some friends of mine on Retirement Island saw their investments heading South. They panicked and sold off those investments just as they hit rock bottom.  Fear motivated them to do the worst possible thing - buy high and sell low.

Fear whispered in their ear "Sell it now, while you can still get something for it! It may go down further!" Months later, the market recovered, and they found that by selling at the nadir, they "locked in" their losses, while their less fearful friends enjoyed at least a partial recovery.

Debilitating Fear takes on a number of forms:
  • Fear of Crime
  • Fear of retiring poor
  • Fear of losing a job
  • Fear of losing "things"
  • Fear of Repair Costs
  • Fear of depreciation or losing more money
Fear is rarely a useful emotion. This is not to say it does not serve a purpose. You should be afraid of high power lines, loaded handguns, toxic poisons, dangerous people.  But you should ACT on those fears, not be paralyzed by them.

Fear destroys. A tightrope walker learns to control and manager their fears. If they are afraid while walking a tightrope, well, then they will fall off.

Fear is your mind's way of saying "pay attention" and also your mind's way of saying "time to change something."   Like depression, it should be a wake-up call that you need to change the way your are living your life.  But all too often, people spend an entire lifetime living in fear - or living in depression.

Fear can be useful, if managed and tackled.  If you ignore fear, then it just festers and builds, until it is unmanageable and controls your life.

If you are having fears, sit down and ask yourself why. What is it in your life that is making you fearful? Are you afraid of losing your job? Why? It is because your job performance is below par, or the boss doesn't like you? Or maybe the company is not on solid footing and will lay off everyone soon? What you may be perceiving as "fear" may be your subconscious trying to tell you to wake up and take notice of what is going on around you.  Maybe it is time to send out a resume or two and look for a new job.

The same is true with money. If you are afraid of running out of money, perhaps it is because your subconscious is telling you that your finances are not in order.  It is pretty amazing how the brain reacts to money.

For example, when I sold my house a few years back, for a brief period of time, I had no debt, and literally hundreds of thousands of dollars in the bank.  It was a very relaxing time, to say the least.  No stress, no fear.  But of course, like most Americans, I quickly went out and bought another house and got back into debt, and my stress level went back up again.  Not much, but I was definitely not as relaxed as before.

Many people in the USA live in a financial nightmare of never-ending debt and payments - all so that they can have shiny objects in their garage and a bigger flat-screen television.  And then they live in fear - fear of losing what little they have been able to accumulate.

I think the secret is to listen to fear and then take action.  If a nagging fear tells you something is too good to be true, listen to that fear, and investigate.  But don't let it dominate your life or force you to make decisions you will regret later.

But fear sells, and marketers and financial institutions use fear to sell you products you don't need, or at over-inflated prices. Let's examine some instances where fear is used to compel people to buy - or over-pay.

1. Identity-Theft Protection

The Fear: Someone will "steal your identity" drain your bank account, run up tens of thousands of dollars of debt you will have to pay off, and ruin your credit rating.

The Product: "Credit Protector Service" usually sold at $8 to $35 per month, basically a computer program that sends you e-mails when anything changes on your credit report.

The Reality: Hyped-up media stories about "Identity Theft" were being planted by the credit card industry to sell their "services" for protection.   Many of the "real life" stories had gaping holes in them, of course.  The "identity thieves" were often family members or friends of the "victim" or the victim themselves.  And while the stories implied the victim would have to pay off the debts incurred, it is basic and well-settled law that you are not responsible for other people's debts (and for banks and other credit agencies who loan money to people without checking their ID first).   Existing credit card protections insulate you from fraudulent charges.  And no one can "drain your bank account" unless you do something stupid like hand out your PIN number to a phishing scam e-mail.  In short, the risk of random identity theft is not as widespread as they make it appear.  Scary statistics on the subject are skewed, as any credit card fraud is now logged as "identity theft" by the industry - to crank up the fear levels.

The Alternative: Check your credit card balances and bank balances every week, if not every other day. Limit the number of credit cards and debt you have. Keep all your receipts and keep track of your spending.  If you wait until the end of the month to review your bill, you are not really managing your money anyway.  You can put a "lock" on your credit to prevent anyone from opening an account without written authorization from you. "Credit Protector" is an unnecessary waste of money, one that is sold strictly on a fear basis.

UPDATE November 2014:  Some credit card companies (e.g, Barclay Bank) offer "Credit Score Monitoring" for free, if you have the credit card.   This is not enough to go out and get such a credit card, but it illustrates why paying money for "credit score monitoring" is stupid.   It costs them nothing to have a computer programmed to monitor your credit score and notify you via e-mail of any changes.   But that being said, you really don't even need "free" credit score monitoring, either.

2. The New Car

The Fear: Your old car will break down somewhere, leaving you stranded on a rainy night and vulnerable to "the slasher" or some other psychotic criminal.   Alternately, it will break down, leaving you with repair bills in the thousands of dollars that you cannot pay. Or, your children (particularly daughters) will break down and be raped in the night.  Better to buy a brand new car and avoid the risk! (Sound silly? Adults have explained this to me in those exact terms, I kid you not!).   Another fear I have heard from otherwise rational people is that they should "unload" a perfectly functional and sound vehicle, on the ground that it may "depreciate" more.

The Product: New cars, either bought or leased, financed at high interest rates, depreciate 20% in the first year of use, 50% by the fifth year, with high-cost collision insurance required.   The cost of buying an owning a new car every 3 years or so is more than double that of owning a good quality late model secondhand car and keeping it for 8-10 years.  In other words, you could own two cars for the price of one.

The Reality: A well maintained car rarely breaks down, even over a decade or more (I have not been stranded by the side of the road in over 20 years, and most of my cars are well over ten years old). Even if "stranded", everyone has a cell phone today, and a local tow truck can be called quickly and covered by AAA. Major components of any modern car will last easily 100,000 miles or more - sometimes 200,000 miles. The idea that a repair will bankrupt you is ludicrous. If the car breaks a major component that costs more to repair that the car is worth, you junk it, plain and simple. By the way, this same fear is used to sell overpriced and largely useless "extended warranties" (see below).

The deprecation argument is idiotic.  All cars depreciate, and none depreciate more than a new car.   To dump a used car because it might depreciate $10,000 in the next five years and buy a new car that depreciates $10,000 in the first ten minutes of ownership makes no sense at all.

The Alternative: Look for a late model (2-3 year old) reliable model (Toyota, Honda, etc.) used car with low mileage, preferably from an individual owner who bought it new. Many people are "afraid" of buying a car from an individual, thinking they will get "ripped off".  These same risk-averse people think nothing of paying 20% more for the same used car from a dealer.   An individual has to take less money, and chances are has the same level of negotiating skills as you do.   It is a far better and more level playing field that any dealer.   Do the research, and shop for the same make and model car (as opposed to impulse-buying a model or trying to cross-shop different makes, models, and years).  Have your independent mechanic inspect the car before you buy it (and you do have a good relationship with a local independent mechanic, right?)  Maintain such a car and it will last 8-10 years or more, and cost less than half the cost of buying brand-new cars every 3 years to be "safe". And guess what? It can be just as reliable, if not more so, than a new car.

3. Over-Insurance

The Fear: You will be horribly ravaged in an accident, or die, and your family will be bankrupted.  Or your car will be stolen, and your "investment" lost.   Your home will burn down and you will lose all the precious possessions you have accumulated over a lifetime.

The Product: While having some insurance is a sound idea, the insurance industry uses fear to sell you more than you need. Towing insurance, rental car insurance, replacement cost insurance, contents coverage, disability, nursing home, excess life insurance, low-deductible collision, etc. are all pushed on consumers as the companies make more money on these policies for little additional risk. "For only pennies a day" you can insure the $250 windshield on your car.  Is it worth it?

The Reality: Like any other financial decision, there is always a cost/benefit analysis to perform. Risk-averse people like to tell stories about how the insurance company "covered everything" from a minor collision, but they fail to account for how much in increased premiums they paid for this coverage. Yes, the insurance company might give you a free rental car or some other benefit, but the reality is, it was never free, but more than paid for through your policy premiums.

The Alternative: Evaluate your insurance needs carefully.   Insurance companies like to say "You car is your second-biggest investment" when in fact it is just a rapidly depreciating piece of equipment.   Buy a secondhand car (see above) and use a high deductible collision policy ($1000 deductible) for the first few years, then drop collision entirely.   Avoid rental car and towing coverage (join AAA instead and get free maps).  For your home, go to as high a deductible as possible ($10,000 instead of $1000).  The name of the game here is NOT to burn down your house. The savings in premiums will exceed the deductible amount over time.

An Example: One egregious version of this scam is loan insurance.  Banks will offer, for "a few dollars a month" to insure your car loan, so if you die, your spouse will not have to pay off the loan.   Similar offers are made for mortgages as well.  For the cost involved for such life insurance(which is what it is) you can buy a term policy for 1/10th the cost. Again, the selling point is fear, and often the poorest segments in our society succumb to these sales tactics, as they live in fear of losing what few possessions they have.

4. Alarm Systems

The Fear: As shown on TeeVee, the burglar (usually a white male in a ski mask) smashes a window on a house occupied by a young mother and two small children. The young mother runs around in a panic and then activates the burglar alarm, which scares off the bad man in the ski mask immediately.

The Product: An alarm system, either sold to you or leased, for a "low monthly payment of only $99 a month including monitoring". That's $1200 bucks a year, or $12,000 over a decade. Enough to buy yourself a used car every ten years (about when you'd need one, too).  Of course, this doesn't include all the fines you'll get from the county police for all the false alarms you'll get.

The Reality: Home invasions are very rare in most urban and suburban areas.   Most burglars want to steal things, not rape your wife.  And for that, they want to enter during the day.  Most alarm systems can be easily defeated by cutting the phone lines at the network interface box mounted on the side of your house.  An alarm system does little to deter a professional thief, but can be a costly nuisance to the owner.

The Alternative: If you live in a neighborhood where people break into homes on a regular basis and steal things, ask yourself why you want to live there.   And if you do, ask yourself why you want to own expensive things in such a place.  Is it really worth $99 a month for an alarm system to protect your $599 flat-screen television? Spend that $99 a month on a mortgage payment for a home in a nicer neighborhood.  You will be far safer and make out better financially in the long run.

By the way, the same applies to car alarms. Young kids in bad neighborhoods put expensive stereo systems in cheap cars, and then buy obnoxious alarm systems to "protect" their "investment."   Better off not to flaunt wealth in a bad neighborhood, or better yet, to just move to a better neighborhood, where the neighbors don't consider a car stereo a major asset, or you can park your car indoors at night.

Note that this same FEAR is used by the handgun industry to sell weapons.  Criminals will attack your family!   Only a pistol will stop them!  Obama will turn America into a Socialist Paradise!  Better buy as many guns and rounds of ammunition NOW as you can - before it is too late!   I've met people who cave into these fears. When I ask them why they need 20,000 rounds of ammunition, they say "Well, it is always a good thing to be prepared!" They are letting FEAR force them into buying something that they will never use.  The Fear mongers, in the meantime, make out like bandits.

5. Extended Warranties

The Fear: Your car, or toaster, or television will break down just out of warranty, and you will be stuck with repair bills in the thousands of dollars.

The Product: An extended warranty, offered these days on everything from homes, to cars, to electronic appliances, promises to pay for all your repairs should something break, replacing your fears with "peace of mind."

The Reality: Many of these warranties are hugely overpriced and the same amount of money, put in the bank, will more than pay for any repairs, if needed, or be a bonus windfall if none are required. Taking care of products is a better substitute for relying on warranties.   Moreover, in many cases, the warranties are written in such a way that it is nearly impossible to collect.  You'll spend countless hours on the phone or writing letters in futile efforts to get reimbursed for repairs.  Most "big ticket" items on cars rarely fail, and small items are often not covered.  Electronics usually fail early on (infant mortality) while the standard warranty (or a store's return period) is still in effect or after a long life of service (after the extended warranty expires).  You'll rarely, if ever, collect on these.

The Alternative: Take that extended warranty money and put it in the bank.   Maintain your equipment and keep it in good order and it will last longer.  Stop driving your car like you just stole it - slowly accelerate, take the curves easy and anticipate your stops.   Properly cared for, most equipment rarely breaks, and if it does, the cost of repairs is usually far less than the cost of an extended warranty.

An Example: I bought a small television for my bedroom in 1987 from Circuit City. The salesperson heavily pressured me to buy a $25 "extended warranty" for this small $99 set.  After telling me how great it was (to get me to buy it) he then told me how horribly bad it was made (to get me to buy an extended warranty).  Naturally, I declined.  More than 20 years later, the set still works (I watch Netflix videos on it).  Circuit City, whose business largely depended on high-pressure sales tactics and such useless add-ons as extended warranties, has gone out of business.

6. Cell Phone Insurance

The Fear: Your cell phone will be lost, stolen, or damaged, and you will have to go out and pay hundreds of dollars for a new one.

The Product: Cell Phone Insurance, "for only a few dollars a month" will replace your cell phone with a new one if yours is lost, stolen, or damaged.

The Reality: If you take care of your things, the chances of them being lost, stolen, or damaged is slim. Cell phones are not expensive items - only a few hundred dollars each. If that seems like a lot of money to you, don't get one. Many cell phone insurance plans only offer to replace your phone with a "like model" - often used. The overall cost of "only a few dollars a month" can exceed the price of a new phone over time.

The Alternative: Don't own expensive trendy phones. If having the latest gadget to impress people you don't know is high on your list of priorities, then maybe you need to reconsider your priorities. Many cell phone carriers offer FREE phones if you sign for a new plan. So if you lose your phone after a year or two, trust me, the company will be happy to replace it for free or at a reduced cost. Inexpensive "throw away" phones can be bought for a few dollars, if you are really the sort of person who loses things on a regular basis.

7. Virus Protection

The Fear: You'll open an e-mail from Aunt Hattie and the screen will go blank, a skull and crossbones will appear, and all the valuable pictures of your grandchildren will be wiped from your hard drive.

The Product: Various virus protection programs are offered on a subscription basis, usually for $39.95 a year, often installed on new computers by default. They claim to scan all your files and e-mails and even websites you visit for malicious viruses or the like. Some ISPs offer "virus protection" packages for $9.99 per MONTH, which is nearly as much as the cost of Interent Service itself!

The Reality: Most web-based e-mail services (Hotmail, Gmail, Yahoo) offer virus scanners built-in, for free. If you educate yourself about computers, you'll know better than to download .exe or .com files from strangers or even from friends. The danger of a virus damaging your computer is slim, if you don't do stupid things online. And most computer failures (hard drive crash) are wrongly attributed by the owners to a "virus" as they don't understand computers.

The Alternative: Stop using POP server e-mail (Microsoft Outlook). If you don't know what that means, then you need to learn more about your computer and the Internet. Use a web-based e-mail service, with free, built-in virus protection. These services are all but immune from e-mail worms as well (which exploit weaknesses in Microsoft Outlook). BACKUP your files that you don't want to lose onto another computer (your laptop or an older obsolete computer) or a removable hard drive, USB dongle or the like. It takes only a few minutes to copy files if you really want to protect them, and it will protect them from hard drive crashes as well as viruses. Use FREE online botware (Spybot, etc.) to scan for resident bots and screen for malicious websites.

Note also that web-based e-mail (Hotmail, Gmail, Yahoo) is free and can be accessed from any computer anywhere in the world, even when you are travelling. And once you setup your e-mail address on a web-based site, you never have to change it again, ever, ever, for the rest of your life, even if you change internet service providers or move or whatever.

* * *

These are just a few examples of how marketers use fear to sell products that you don't need, or more product than you need, or a product at an over-inflated price.

Note that many, if not most of these scams are aimed at the poor or lower classes, who are often paranoid about losing what little they have, to the point where they over-insure their lives.

You can often spot these scams by one simple come-on line: "Peace of Mind". When you see a product or service promoted on the basis of "Peace of Mind" then chances are, you are being sold on FEAR.

The premise is, you give them money, and they give you "Peace of Mind". But in many cases, it is a false sense of security. The peace of mind is illusory, as if something bad happens (car repair, losing your cell phone) the consequences are not all that bad, and the hassle of dealing with these policies or contracts often exceeds the difficulties in just addressing the underlying problem head-on.

As I noted in the beginning of this piece, fear does have its uses. You should pay attention to it and take action. But letting fear cow you and heard you into poor economic decisions is not the answer. Being risk-averse (fear) is rarely the best course of action (or inaction).

By the way, watching television is one sure way to succumb to FEAR. Television thrives on fear in its advertisements, and even in the news ("Hurricane in the forecast? Stay tuned for News at 11!"). People who watch a LOT of television (most Americans) end up buying these fear-based products, as they are conditioned to believe that any minute, their lives will go spinning out of control.

Taking charge of your life and your finances requires that you take some risk and confront some fears. Yes, bad things will happen to you in life. You can buy all the insurance, warranties, and credit-protector you want, and these bad things will still happen, and likely you will be a bit poorer in the process.

We have a finite amount of time left on this planet. Go out and use it, and don't succumb to FEAR.