Thursday, May 2, 2013

The best personal finance paragraph I read yesterday

...courtesy of Slate business/economics blogger Matt Yglesias*:
Now since we are in fact living in a 401(k) world, here's some advice. You've got to save a lot of money for retirement. More than you think. More than you want to. And you need to put that money in a broadly diversified, low-fee fund. And you have to keep it there. Don't panic when the market plunges and sell. In fact, unless you're planning on retiring in the next decade, don't even check how it's doing. Just buy and hold and shift into something less volatile when you're near retirement. Vanguard has these good Target 20XX funds that automatically shift you into less volatile products as you get closer to your target retirement date, allowing you to do even more ignoring of the state of your investments. Which is good. The only way for anyone to make any money managing your savings is to try and trick you into making trades you shouldn't make, or buying products you shouldn't buy.
I agree with this a lot. (So much so that I get pretty upset thinking about expense ratios that I impact me in my 401k and how much I do not like them.) 

*One should note that Yglesias is better-off than the average household, so perhaps a grain of salt is in order. 

9 comments:

  1. The Aqueous LayerMay 2, 2013 at 10:22 AM

    Watch this. It was sobering.

    http://www.pbs.org/wgbh/pages/frontline/retirement-gamble/

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    1. Yeah, I read the accompanying blogpost; I was a little bit irritated at the breathless tone at which it was reported. (Perhaps that's my default, when I'm reading something that I think I know something about...)

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    2. The Aqueous LayerMay 2, 2013 at 12:22 PM

      When you get an hour, watch it. The interesting part is discussing the fees that 401K funds charge, and what a 2%/year fee does to your over-all earnings down the line. I was floored.

      The discussion about Index Funds versus actively managed funds is also something to think on...

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  2. Buy and hold is probably the best among all other options, but I always get annoyed with the notion that "over the long term stocks go up". $1 invested in the SPY in March 2000 would have been worth ~$0.75 (adj for inflation) in January 2013. (I'm ill-impressed with 90 years of stock data---'Early into the Great Depression John Maynard Keynes was asked if any thing similar in history had ever happen. “Yes”, he replied, “It was called the Dark Ages and it lasted 400 years.”').

    I don't think this "The only way for anyone to make any money managing your savings is to try and trick you into making trades you shouldn't make, or buying products you shouldn't buy" is uniformly true, but it's also not inaccurate (cf. "Where are the customers yachts"). There are actually some good money managers out there, it's just close to impossible to really know who they are. Guys like Steve Cohen, Stanley Druckenmiller, or Julian Roberston did make bank for their clients.

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    1. Does that include dividends? As I recall, it looks similarly ugly (i.e. negative), but not as bad.

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    2. An interesting graphic for the "long term increase" argument.

      http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html

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    3. Oh, and for those of you that like an empirical monte carlo model(?) for your analysis, here's firecalc:

      http://firecalc.com/

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    4. I like this graphic illustrating how much of an impact timing has on entry and exit points:
      http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html

      tl;dr Annualized rate of return varies greatly depending on what year you buy and sell.

      Sure, comparing the stock market in the 2000s to the 30s/40s is like apples to... well, broccoli, but the concept is the same: buy low sell high, although it's tempting to do the opposite.

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  3. Returns do include dividends.

    LOL on Monte Carlo simulator: I love it when people in finance use these and don't understand where the term Monte Carlo comes from....I mean, it sounds scientificky, so it HAS to be precise!

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