Having grown up in South Jersey with half of my family being from Northeast Philadelphia, the dish "scrapple" was a mainstay at family get-togethers. For those not from the greater Philadelphia region, the best way that I can describe scrapple is a brick of “meat-like-substance,” that I presume is made up of leftovers that were not considered fit enough to become sausage.
The truth is, I don't know anyone who knows what scrapple is made of, but when I was a kid, if you threw some ketchup on there, I would eat it with a smile. While I had no idea what was in scrapple, I am certain that if I ate it regularly, I would have felt some serious health consequences 5, 10, 20+ years afterwards. While it seems obvious that eating a processed concoction of who-knows-what is bad for our health, most people are eating "investment scrapple" right now and they are not thinking twice about it.
To illustrate what I mean, we will go back in time to a happy little time called the mid-2000s. During this time, the obvious examples of "investment scrapple" were the infamous mortgage bonds and collateralized debt obligations (CDOs) that filled up most people’s 401ks and retirement plans. No one really knew what made up these instruments, but the credit bureaus put AAA ratings on them and people gobbled them up. Finally, but too late, it became obvious to the world that these instruments were made up of, in essence, “financial meat by-product not fit for sausage.” Every one of these investments went terribly bad, causing anyone who “ate” it to become financially ill, and some never recovered.
I believe that the vast majority of people did not learn their lesson from the past, and are still eating "investment scrapple" today. The majority of people for their investments give their money to someone, who gives it to someone else, who gives it to someone else, who then buys an investment product for the paying client. These products include stocks, bonds, mutual funds, annuities, etc. However, the truth is that the clients who own these products have no idea what these products are or how they tick.
Now, you are probably thinking to yourself, "Buddy, you are crazy, this is not the mid-2000s, I have my money in the best mutual funds, stocks & bonds out there, I know exactly what they are as I can name all of them and they are all great!" To that I have to ask, Do you really know what these products are? I mean, have you:
- inspected every mutual fund and checked every asset that makes it up?
- Have you gone to every stock's company headquarters and performed an audit of their finances, policies and examined the qualifications of their board of directors and officers?
- Have you examined your bonds and scrutinized the underlying loans or the underwriting performed on the debts that make up the bond?
Of course not, that would be insane, it would take a crazy amount of time and there is likely no way that you could get access to all of the information needed.
The point here is I think that it is important for people to have investments that are EASY to understand, so easy that they can be explained to a five year old, or maybe even an above-average cocker spaniel. I know that when I hear explanations of stocks, bonds, mutual funds, etc., I typically have no idea what the asset is or what makes it tick, and I am certain that I am not alone. The last thing that anyone wants to do is put their hard earned money into an asset and have no idea what that asset is.
You are probably thinking, “What options are there that are easy to understand?” Much like I discussed in another blog post about avoiding market fluctuation, there are tons of "simple" investment assets out there that are easy to understand. The problem with them is that they take a little more time, effort, and education than simply buying a mutual fund or stock.
To bring it back to the food analogy, these simple investments would be the equivalent of making dinner of whole vegetables grown in your back yard in that you can see the parts of the meal and know where it came from and how it is cooked. However, there is more work and education needed in preparing and cooking this meal for consumption than there is in heating up scrapple in a pan.
A perfect example of a simple investment is rental real estate. Every month rent is collected from tenants, every month operating expenses and mortgage are paid. Whatever is leftover is the owner’s to keep. With this investment, one can easily see where the money is coming from and where it is going, it is simple.
While this is simple, it is not necessarily easy as the owner has to make sure that the tenants pay, that the repairs are made, the mortgage is satisfied, the laws are followed, etc. While owning and managing a rental property may not be as easy as handing your money over to someone to buy a stock or mutual fund, it is likely that you will be grateful 5, 10, 20+ years from now that you did.
Let me be clear, I do not believe that you should now go and remove all of your money from stocks, bonds, mutual funds, etc. immediately after reading this. What I am saying is that, like food, do NOT be a mindless consumer with your investments. Rather, know what you are buying and what it is made up of (I mean, really know), and if you cannot figure it out (or it is impossible to know), be mindful of that fact.
Much like scrapple eaters, some eat it without knowing what it is made up of, others eat it knowing that what they are eating is not very good for them, but they love it so much they don’t care, and others come to the realization of what it is made up of, and decide to stop it eating it altogether. So, which category do you fall into? Please comment below as I would love to hear your answer.