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The Problem With Accumulation Theory

Few financial planners truly understand the problems of the accumulation theory of financial planning. Financial planners are responsible for educating the public, and therefore the general public ends up adopting the views (in a broad sense) that are taught by advisers and large financial institutions. This, in turn, leads to the adoption of a financial planning theory which can never lead to long-term success.

What is accumulation theory?

Accumulation theory teaches us that we should focus on hard numbers, and that's it. That the total value of our assets is what matters. In other words, it focuses on the accumulation of money and other assets for the sake of accumulating them. A thinly veiled goal or purpose for the accumulation (like "retirement") may serve to assuage the temptation to be completely arbitrary and rationalistic in our savings and investments. But, ultimately, the accumulation theory focuses on the accumulation of an increasing amount of assets with no rational basis for the accumulation. Why accumulate $1 million as opposed to $1.02 million as opposed to $2 million or even $758,848.63? The arbitrary dollar amount we place on retirement income, or total savings for retirement, is just that: arbitrary.

This is a problem. What happens when one attempts to accumulate assets in contradiction to their stated or actual values in life? While it is common for people to sacrifice their future for immediate pleasures, it is also common that people sacrifice their current happiness for future happiness (or, perceived happiness and security). These people are the perpetual penny-pinchers, cheapskates and thrifty folks who have no or very weak and undefined financial goals. Instead of living a rich and fulfilling life, they live in self-imposed poverty, sometimes feeling that they aren't or cannot achieve the life they really want, because they have to "make sacrifices for their future."

It wrong to sacrifice your future for the present, but it is also wrong to sacrifice the present for your future. The issue is not "should I live for today at the expense of my future" vs "should I live for the future at the expense of today." The issue is "should I sacrifice my values for any reason?"

Financial advisers seem to be in a constant struggle to try to encourage sacrificing for the future, while clients may want to sacrifice their future for their present. The fact that a majority of financial advisers adopt the accumulation theory is not surprising. The idea of self-sacrifice is not new. Many financial advisers never look to the source or root cause of money, and thus never realize the implications of what they are recommending.

Exceptions to the rule are advisers like Garrett Gunderson. In his book "Killing Sacred Cows", Gunderson writes:

One of the key problems associated with following
the accumulation theory is that it leads us to believe
that money is power, and that we should place our
faith in money, rather than in the things that create
money. But in a world of cause and effect, value
creation is a cause, and money is an effect. Money
is not power; it is merely a representation of value.
Money is never manifested and exchanged until
value is created, and thus is an expression of value

The accumulation theory teaches us to focus on
the byproduct of value creation (money) and not the

This simple idea escapes not only financial advisers but the general public at large. While I do not agree with everything Gunderson has to say on financial planning, I do agree with him on this point.

The implications reach farther than just value creation. They speak to a central purpose in life. Ultimately, people following an accumulation theory approach are seeking the effect without the cause. They are seeking money (and other assets) while trying to ignore the values, goals, and central purpose that makes making money possible. Yet, this is something which, in reality, cannot be done successfully.

If individuals want to achieve any objective measure of financial success, they need to know what constitutes success, first. Then, they must dump the false notion that some form of sacrifice in life is necessary to achieve that financial success. Finally, a real understanding of production, value, time, and savings needs to happen. Will any of this happen?

This entry was posted on May 18th, 2011 by David C Lewis, RFC. Edits may have been made to keep this entry current. · No Comments · Insurance & Savings, Investing, Philosophy In Financial Planning, Retirement Planning

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