This post appears in the Facebook discussion group for my LearnLiberty Personal Finance Course.
A Weekend Thought on Investing and Personal Finance: If behavioral economics and psychology have taught us anything, it’s that people are not very good at making “optimal” decisions about how to use their time, talent, and treasure. A bit of introspection suggests that it’s probably true of all of us on one margin or another.
We tend to make the perfect the enemy of the good. With investing, a lot of people get overwhelmed and default to “I’ll do it later” (where “later” never comes), and they end up in the unfortunate position of many people who are facing retirement within the next decade or two and who have nothing saved.
Therefore, it’s a good idea to have lots of ways to trick ourselves into doing the right thing. In his book “I Will Teach You To Be Rich,” Ramit Sethi argues for “the 85% solution:” give yourself permission to get 85% of perfect. For most people, the choice they make isn’t “8% with high variance or 4% with low variance?” It’s “did I invest at all?” 85% of something is better than 100% of nothing; sadly, a lot of people get overwhelmed and choose the latter and promise to do it “later.” Later never comes.
READER COMMENTS
AMW
Oct 4 2014 at 11:56am
My employer matches contributions to a retirement account up to 6% of income. They offer accounts with three vendors, each of which has multiple options to invest in. A colleague who was hired at the same time as me asked for advice on where to put his money, and lamented that he didn’t know what the best option was.
My response was, “who the hell cares where you put the money? The employer match means that just setting up your account gives you a 100% return on your investment. The rest is a rounding error!”
Rob
Oct 4 2014 at 3:29pm
The crucial caveat here is that you actually have to care about old-you.
And not just superficially, but sincerely.
If you don’t, giving yourself a cheap and socially acceptable excuse not to transfer wealth from now-you to old-you is absolutely rational.
Hazel Meade
Oct 6 2014 at 12:49pm
I always though the whole point of mutual funds is to let someone else do it for you.
There are plenty of mutual funds with varying degrees of risk vs. return. So just pick one for cying out loud.
My 401(k) even has boring, generic options like “Retirement 2040” so you can just stick 100% in one of those and stop thinking about it.
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