Sunday, March 10, 2013

Money paralysis

In the past week, two of my friends have mentioned they’re not sure what to do with their money – too much of it is sitting in a savings account earning less than 1% interest, but there are a lot of options to consider.  On the surface, this is not an entirely sympathetic problem – “I have so much money I don’t know what do with it”.  But we’ve probably all felt it to some extent: money paralysis.  You want to be smart and set yourself up for success, to be in the position to buy a house, pay for a wedding, move somewhere, have kids, or change jobs when the time/opportunity comes.  Too bad there isn’t a timetable for when all of this is supposed to happen, or whether it’ll happen at all.

Investing, especially, looms over us as something very intimidating and complicated.  My image of investors was of rich, not-nice men, who had somehow made their money ‘playing’ the stock market, maybe at the expense of others.  Even now, when I see friends get together and talk about investing – they start throwing out names of companies and bragging about their skills at timing purchases, and I instantly feel incompetent and overwhelmed by the information I don’t know.  Then I remember – it’s very, very unlikely that an individual can consistently beat market performance, and that numerous studies have showed that investments of those who actively trade perform worse than those of passive investors.  Oh and that those (actively trading) suckers are paying money for each and every trade they make, which eats away at their profits.

Investing is necessary for most of us.  It can also be very, very easy.  (Stay tuned for how I use index funds to deliver, with about 5 minutes of work in the past year, returns after fees of more than 10%.)  We’re in an interesting position: inflation has been very low, and the Fed is keeping interest rates low in order to raise it.  Some amount of inflation is healthy: it means we have an incentive to buy now, as our money is worth more than in the future.  In our current situation, it means that interest rates are at an all-time low for checking and saving accounts: 1% at the absolute most.  Is it hard to imagine that in other times, 5-6% was a common interest rate for basic savings accounts?  It seems more stressful now to leave your money in a savings account, knowing it’s not working for you (or working part-time and has a bad work ethic).

If we were robots (or homo-economicus rational beings) the plethora of vehicles for savings & investing would be welcomed with open arms.  Instead, too many choices make it easy to not make any choice – which is basically the worst choice.  (Favorite example: not getting a prenup doesn’t mean you don’t have a financial contract should the worst happens, it just means you trust the government to have made the contract and decisions for you, rather than making your own.)

Has anyone else felt overwhelmed with how best to prepare for the future (which to those of us who can’t predict the future still remains unknown)?  If not, is it because you have a crystal ball (and will you share)?  Or is it because you’ve figured something else out (and will you share)?

1 comment:

  1. Apologies for the wackiness of the font ... not sure what happened here.