A recent Get Rich Slowly post asked whether one should stop investing for retirement in order to pay off debt. It’s an important question, and one that I’ve attempted to tackle before. But what I really want to talk about are the comments that were left on the GRS post.
They’re frightening. And I’m not saying this just to be snarky (though, admittedly, I do partake in a little snark from time to time).
Some people were attempting to mathematically justify paying down debt rather than taking advantage of a fully vested, 100% employer match. Now, if you gain a valuable psychological benefit from paying down debt, that’s fine. Go for it. But how somebody could argue that a 20% return is mathematically superior to a 100% return escapes me.
Other commenters argued that, if an investor is young, it’s better mathematically to invest for retirement, rather than to pay down debt–even if there’s no employer match to be gained, and even if the interest rate on the debt is higher than the rate of return from investing for retirement.
“The Horsepower to Do the Math”
This all reminded me of an article William Bernstein wrote a few months back, where he argues that most people just aren’t qualified to invest on their own. Bernstein estimates that less than 10% of the population has “the horsepower to do the math.” He elaborates,
“Fractions are a stretch for 90% of the population. The Discounted Dividend Model, or at least the Gordon Equation? Geometric versus arithmetic return? Standard deviation? Correlation, for God’s sake? Fuggedaboudit!”
I’m inclined to think that his estimate is overly pessimistic. (Is it really that hard to explain correlation?) And I’ve always thought investing mistakes aren’t caused by a lack of math skills so much as by a decision process that’s not based on math at all. (“I’ll just hold this stock until it gets back to where I bought it,” for example.)
But I may be wrong. Thoughts?