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The Danger of Being Financially Dependent

How the market crash helped drag me out of my financial ignorance

Financial dependence is born of ignorance. When you are financially dependent on others, you don’t know what to do with your money. You don’t have the skills and confidence to manage your own money. Think about it—how many poor financial decisions are made in our society by people who simply don’t know any better?

When you look closely at the situation, you’ll suddenly realize that most hands-off types of investing accounts such as 401(k)s have created an entire generation of people who are investing without understanding. Even though we are a nation that is good at earning money, we have fostered an environment that stifles financial independence while simultaneously growing the need for financial dependence.

Look around your own neighborhood. Chances are, most people depend upon a corporation or the government for their financial well-being. Sadly, the track record of these big institutions shows that they don’t care much at all about our well-being. Instead, they are very much interested in growing, getting more power, and gaining more wealth—usually at the expense of the individuals who are reliant upon that organization.

It’s good to have financial advisors and other trusted experts in your life. But when we hand over decision-making power we are handing over our financial independence. We need to be the ultimate decision-makers.

Again, financial independence is less about money and more about a person’s attitude and education.

For Me, It All Started with the Dot-Com Bubble

We humans, by nature, are good at reacting to things that are happening to us right now. Very few people have the time, energy, or vision to see how a new idea today can lead to problems down the road. For example, it would have taken a very sharp individual to foresee how the legislation that led to the emergence of 401(k)s—namely ERISA (Employee Retirement Income Security Act)—would become problematic 30-plus years later.

Most of us are just too busy with our everyday life. We don’t have time to read the fine print of every new idea put forth by the government. For me, it took a very painful and personal event to alert me to what was happening all around us.

I first began to question 401(k)-type retirement programs, and the mutual funds that make up the bulk of these investments, during the dot-com crash that began in March of 2000. In those days, I was just an average mutual fund investor like everybody else. And just like everybody else, my wife and I suffered some significant losses to our mutual fund investments in the dot-com crash.

What we began to realize was that the so-called diversification of mutual funds does not protect against a system-wide crash. For as long as we could remember, everyone had been preaching to us about mutual funds. We thought we were doing the right thing. But it took that crash to make us realize how vulnerable we really were.

I began to think about the whole situation in an entirely new way. And I asked new questions. If the mutual fund approach of the 401(k) system could leave me so vulnerable to a large crash, then why did the industry push mutual funds so hard? Why were they telling me that this approach would help me manage risk and diversify to prevent big losses when it was clear that the opposite was true?

The answer is simple. It’s because 401(k)s and mutual funds create huge piles of money for these institutions. The 401(k) and mutual fund systems operate on greed. They do not operate on wisdom. They are finely-tuned, turbo-charged money machines.

When I started digging into how the mutual fund industry really works, the discoveries were absolutely shocking.

In my next post, I’ll show you exactly what I learned—and why it should make you angry enough to finally take control of your own financial independence.