Special Report on Investments and Personal Finance : From Fairy Tales, Financial Truths

Fairy tales can come true. They can happen to you--if you don’t watch out.

If you think about it, fairy tale characters were always in a jam.

Jack, of beanstalk fame, stole from the giant because he’d sold the family’s last cow for a handful of seeds. Recognizing that he wasn’t a good candidate for an MBA, Jack turned to a rather successful life of crime.

Hansel and Gretel were led into the woods--and the clutches of a hungry witch--by parents who had too many mouths to feed. Snow White, a good-looking princess in a day when titles and looks were everything, should have been in the catbird seat. But, alas. Her father, a poor judge of character, died without a will.

The fact is, financial woes that tripped up characters in literature are still bedeviling people today. A look at 10 lessons that classic fairy tales and fables can teach about finance may prove as valuable as a fairy godmother.

1. The Ant and the Grasshopper: Plan Ahead

This is the classic tale of responsibility. The ant works through the summer storing up food. The grasshopper hops, chirps, sings and has a grand time. But come winter, the grasshopper searches mightily--and in vain--for food. He dies, while the ant is comfortable and well-fed.

Planning ahead is the first lesson of personal finance for two reasons. When young, you have more time and opportunity to earn money. Better yet, unlike food, money saved wisely tends to grow. The longer the season, the better the harvest.

Consider: Amy Ant, 25, puts $2,000 a year into a tax-favored retirement account for 10 years--a total of $20,000. At age 35, she stops saving.

George Grasshopper starts putting away $2,000 annually when he’s 40. But he continues to make contributions for 25 years, until he retires--a total of $50,000.

They each earn 8% annually on their savings.

Who has more at age 65? Ant has twice as much as Grasshopper--$333,441 versus $158,504, to be exact. How did that happen?

Ant put compound interest to work. Because she started early and gave compounding more time to do its job, her job was easier.

2. The Tortoise and the Hare: Get Rich Slowly

Think you’re agile enough to “time” financial markets--jumping in at the nadir and out at the peak? If you are, you’re the exception rather than the rule. Even top-notch market timers win only about 10% more often than they lose.

Most people make more by simply plugging along, investing small amounts regularly. In market parlance, the tortoise approach is called dollar-cost-averaging. You sink the same amount of money into your investment account each month--rain, shine, market drop or upswing. When markets are up, your investment buys less. When they’re down, you get more. Either way, you keep moving steadily toward the finish line.

You’ll rarely have one of those swift gains to brag about. But no one will catch you napping when the market moves. And, when all is said and done, wouldn’t you rather win than brag?

3. The Milkmaid and Her Pail: Diversification Pays

Some people like to play it safe. They keep their money in bank accounts so they won’t risk their initial investment.

But putting all your money in the bank poses risks too. Instead of principal risk--the chance of losing some of your initial investment--bank depositors face the risk that inflation will cut their buying power faster than interest can increase it.

Savvy investors spread their money around, putting some in deposits, some in stocks, some in bonds and, perhaps, some in global mutual funds. Such diversification reduces risk simply because it’s unlikely that several markets will fall all at the same time.

Take a lesson from Aesop’s Patty, who balanced a pail of milk on her head while walking to market. Patty daydreamed about using the proceeds to buy a chicken. She would sell the eggs to get a new dress--and that, she figured, would make her friend Polly jealous.

“But I don’t care,” said Patty. “I shall just look at Polly and toss my head, like this. “ The pail went flying.

Had Patty divided the milk among three pails, carrying one on her head and one in either hand, she might have had a poultry farm today.

4. The Pied Piper: Pay for Help When You Need It

Somewhere deep inside, there’s a tightwad in all of us. That’s the voice that tells you not to pay for something you could get for free.

Yet in the financial world, advice that appears to be free often isn’t. For example, you don’t pay a stockbroker an up-front fee. But brokers earn commissions if they convince you to invest. Insurance salespeople, who spend hours explaining how much insurance you need, also earn commissions--the bigger your policy, the more they get.

If you don’t need advice, of course, it’s foolish to buy it. But if you insist on “free” advice, you may lose more in principal than you would have paid in fees.

Just ask the citizens of Hamelin. They stiffed the Pied Piper of the 1,000 guilders he’d earned for driving the rats out of town, so he took something more valuable--their children.

5. Little Red Riding Hood: Watch for Wolves

Who wouldn’t be taken in by a fellow with a smooth voice and a toothy smile? Especially when he says, “I know your grandmother. She just loves flowers . . . “

Today’s wolves are con artists who use just enough truth and familiarity to get your guard down, prompting you to ask fewer questions and to evaluate their propositions with less skepticism.

As a result, affinity frauds--cons in which a member of a professional, religious or educational group preys on other members--are among the fastest-growing financial crimes, experts say. All the con artist has to do is tell the victims that their friends are investing and “everybody falls like dominoes,” laments Sharon Fox, assistant director of securities enforcement for the Arizona Corporation Commission.

Frequently, by the time the con is discovered, the perpetrator has fled. All the miserable victims have is company.

6. Stone Soup: The Lesson of Mutual Funds

When Peg Downey, a Silver Spring, Md., certified financial planner, tries to explain the benefits of mutual funds, she tells the story of Stone Soup.

Three soldiers returning from war approach a town. Seeing them coming, the villagers hide their provisions and say they have nothing to share.

Not to worry, say the clever soldiers: They’ve learned to make soup out of nothing but stones. A pot is set in the town square, and the villagers watch in awe.

“Hum,” says a soldier stirring the rocks. “It could do with some salt and pepper.” A villager runs to get it. “Stones like these make good soup, but it would be ever so much better with a few carrots.” Another contribution. And so it goes until they add cabbage, milk, barley, beef and potatoes.

In the end, the entire town has a wonderful meal. And each contributes just a small amount.

Mutual funds work much the same way, says Downey. The soldiers are like fund managers, knowing what ingredients to add. The villagers are the investors, each contributing a little and coming out with a result that appears to be greater than the sum of its parts.

The only trick, she says, is to find a fund manager that knows the recipe.

7. Merchant of Venice: Get Loan Terms in Writing

For those who have never been able to trudge through Shakespeare, “The Merchant of Venice” is the story of a loan gone sour. It offers cautions to both borrowers and lenders.

Shylock loans Antonio money; if he fails to pay on schedule, Shylock can collect a pound of Antonio’s flesh. Of course, Antonio can’t pay on time. Eventually, the love interest, Portia, saves the day by noticing the deal says nothing about blood. Take the flesh, she says, but if you take any blood in the process, we’ll sue for everything you’ve got.

The moral remains: Whether borrower or lender be, prepare for the worst and get agreements in writing.

This is no less important if the loan is between relatives or good friends. A written contract is of immeasurable help if you need to jog memories or are ever forced to take legal action. And if you must write off the debt, you should have the written agreement in order to deduct the loss on your tax return.

8. Hansel and Gretel: The Sweetness of the Deal Is In The Details

These days, a credit card is a lot like the fabled witch’s house made of candy. The come-on sounds sweet: Low interest rate, no annual fee--and lots of yummy extras.

But before you bite, take a look at what’s inside. With credit cards, that’s usually shown near the back of the offering, under the heading, “Important Disclosures.”

All too often, the disclosures reveal that the low rate advertised on the envelope is “introductory” and will evaporate in six months or less; that you may not get the advertised rate unless you transfer a balance; that cash advances cost more, and that penalties, fees and escalating interest charges can gobble you up if you have a late payment or two.

The good news is that, like the witch--who told Hansel she would fatten him up and eat him--credit card companies do disclose their intentions.

“The information is there, even if it is in small print,” says Michael Heffer, senior staff member at Consumer Action in San Francisco. “Look for it.”

9. Cinderella: The Need for Estate Planning

What happened to Cinderella was a crying shame, attorneys lament. Here she was, the beloved daughter of a wealthy gentleman. He gave her everything when he was alive. But he didn’t write a will. In the end, she was left to the mercy of her wicked stepfamily.

In reality, few people die “expectedly.” As in the fairy tales, most deaths are “untimely,” “sudden,” or “unexpected.” Cinderella stories proliferate because roughly 70% of Americans die intestate--without a will--probate attorneys say.

If you have children, you need a will. Write it without delay.

10. The Miser and His Gold: Enjoy Your Wealth

It’s marvelous to save.

But remember, money is simply a means to an end. The end should be to make your life more secure and enjoyable. Some people get so caught up in their financial security that they forget to enjoy themselves--even when they can afford to, says Edward O’Hara, a certified financial planner in Silver Spring, Md. And that defeats the purpose of having saved in the first place.

“The one thing I am always stressing is that you can’t just look at the numbers. You have to think about your current happiness,” O’Hara says. “I have retired clients who have $2 million. . . . They come to me and say, ‘I can’t believe how much I am enjoying life now that you’ve told me I can spend some of my money.’ ”

Even in less extreme cases, though, everyone should take current desires into account when deciding what to save and what to spend, Downey says.

The alternative? “The Miser and His Gold,” another of Aesop’s fables.

This miser saved every farthing, burying his gold in his garden. Once a week, he’d dig it up just to gaze and gloat. When a robber stole the miser’s gold, he “tore his hair and raised such an outcry” that all the neighbors came to see what had happened.

Now that it was gone, the miser told his neighbors about the lost stockpile. “Did you ever take any of it out?” asked one. “Nay,” said he. “I only came to look at it.”

“Then come again and look at the hole,” said the neighbor. “It will do you just as much good.”

And so, children. The people took the fairy tales to heart. They got their finances in order.

And they all lived happily ever after.