Comments on: Are We Qualified to Invest on Our Own? http://www.obliviousinvestor.com/are-we-qualified-to-invest-on-our-own/ Investing Blog: The Oblivious Investor Tue, 07 Feb 2012 17:04:11 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Mike http://www.obliviousinvestor.com/are-we-qualified-to-invest-on-our-own/comment-page-1/#comment-3873 Mike Tue, 03 Nov 2009 18:08:55 +0000 http://www.obliviousinvestor.com/?p=5243#comment-3873 Mike, I read the GRS post and the comments. My initial reaction was the same as yours. You could almost see the preztel logic from the Ramsey-ites as all answers pointed to debt reduction. I follow several PF blogs/boards and if there's one thing missing from the Total Money Makeover folks, it's math. Then something funny happend. I did the math. Paying off debt (post tax) is often a pretty good option, versus a pretax 401k. I looked at a specific scenario. $1000 pretax per month, 25% tax rate, 100% match, $10,000 balance on a 29% card, 3% minimum payments, 8% investment return. In this example, focusing entirely on the card was the best option. Then again, my math could be wrong ;) Mike,
I read the GRS post and the comments. My initial reaction was the same as yours. You could almost see the preztel logic from the Ramsey-ites as all answers pointed to debt reduction. I follow several PF blogs/boards and if there’s one thing missing from the Total Money Makeover folks, it’s math.

Then something funny happend. I did the math. Paying off debt (post tax) is often a pretty good option, versus a pretax 401k.

I looked at a specific scenario. $1000 pretax per month, 25% tax rate, 100% match, $10,000 balance on a 29% card, 3% minimum payments, 8% investment return. In this example, focusing entirely on the card was the best option.

Then again, my math could be wrong ;)

]]> By: Tom @ Canadian Finance Blog http://www.obliviousinvestor.com/are-we-qualified-to-invest-on-our-own/comment-page-1/#comment-3843 Tom @ Canadian Finance Blog Mon, 02 Nov 2009 23:55:12 +0000 http://www.obliviousinvestor.com/?p=5243#comment-3843 I don't understand why someone would not take full advantage of a contribution match from their employer. At my job, I do get an option to contribute extra to my pension, but my employer does not match any more than the original base amount, so I don't contribute beyond that point. I'm not even happy with how my employer invests, but I will take advantage of the immediate doubling of my money! I don’t understand why someone would not take full advantage of a contribution match from their employer. At my job, I do get an option to contribute extra to my pension, but my employer does not match any more than the original base amount, so I don’t contribute beyond that point. I’m not even happy with how my employer invests, but I will take advantage of the immediate doubling of my money!

]]> By: Rob Bennett http://www.obliviousinvestor.com/are-we-qualified-to-invest-on-our-own/comment-page-1/#comment-3760 Rob Bennett Wed, 28 Oct 2009 15:00:46 +0000 http://www.obliviousinvestor.com/?p=5243#comment-3760 <i>admittedly, I do partake in a little snark from time to time.</i> Not so. I hate snark. So I would notice. I have never seen you engage in snark, Mike. It's not in you. The material at the link you provide evidences a modest and gentle sarcasm. That's as close to snark as you get. It's one of the things I like about your blog. <i>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> That's exactly it. 90 percent of the math that you see put forward by "experts" serves as <i>rationalizations</i> for strategies that are being promoted and adopted for emotional reasons. We are not using math to arrive at good decisions. We are using math to justify decisions elected for emotional (bad) reasons. I do not share Bernstein's pessimism. I believe that if we stopped pretending that we are 100 percent rational creatures, we could escape the circular logic that dooms us today. We are capable of rationality. But only if we first acknowledge the influence that emotion exerts on our decision-making process and make serious efforts to overcome it. We cannot escape emotion by living in denial of it. Denial empowers emotion. We escape the negative influence of emotion by coming to terms with it. The math is easy once there is a willingness to accept what it says. The willingness is not there today. But the market has a way of forcing on us realities that we very much do not want to face. So I see grounds for hope here (with a lot of pain coming before we reach the promised land). <b>Note:</b> The ones who say that <i>others</i> don't get the math (like Bernstein) are often the worst offenders when the math tells <i>them</i> something that they do not want to accept. Bernstein and all the other "experts" are human too. Rob admittedly, I do partake in a little snark from time to time.

Not so. I hate snark. So I would notice. I have never seen you engage in snark, Mike. It’s not in you. The material at the link you provide evidences a modest and gentle sarcasm. That’s as close to snark as you get. It’s one of the things I like about your blog.

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.

That’s exactly it. 90 percent of the math that you see put forward by “experts” serves as rationalizations for strategies that are being promoted and adopted for emotional reasons. We are not using math to arrive at good decisions. We are using math to justify decisions elected for emotional (bad) reasons.

I do not share Bernstein’s pessimism. I believe that if we stopped pretending that we are 100 percent rational creatures, we could escape the circular logic that dooms us today. We are capable of rationality. But only if we first acknowledge the influence that emotion exerts on our decision-making process and make serious efforts to overcome it.

We cannot escape emotion by living in denial of it. Denial empowers emotion. We escape the negative influence of emotion by coming to terms with it.

The math is easy once there is a willingness to accept what it says. The willingness is not there today. But the market has a way of forcing on us realities that we very much do not want to face. So I see grounds for hope here (with a lot of pain coming before we reach the promised land).

Note: The ones who say that others don’t get the math (like Bernstein) are often the worst offenders when the math tells them something that they do not want to accept. Bernstein and all the other “experts” are human too.

Rob

]]> By: Welath Pilgrim http://www.obliviousinvestor.com/are-we-qualified-to-invest-on-our-own/comment-page-1/#comment-3763 Welath Pilgrim Wed, 28 Oct 2009 14:40:50 +0000 http://www.obliviousinvestor.com/?p=5243#comment-3763 Everyone goes through their own process. I suppose if someone is reading PF posts, they are learning - or want to learn. Some will get it....others won't. Over time, we all unfold. Everyone goes through their own process. I suppose if someone is reading PF posts, they are learning – or want to learn.

Some will get it….others won’t. Over time, we all unfold.

]]> By: JC http://www.obliviousinvestor.com/are-we-qualified-to-invest-on-our-own/comment-page-1/#comment-3762 JC Wed, 28 Oct 2009 14:32:49 +0000 http://www.obliviousinvestor.com/?p=5243#comment-3762 agree - it's not just the math. math is just a tool that can be manipulated to say what you want. math, like most analytical tools, has assumptions. change the assumptions and the math works out differently. we are therefore biased on what assumptions we choose. "assume it is 100% matched and vested and getting 8% annualized return", "assume the CC debt interest remains the same", "assume i will be gainfully employed...".....obviously we have to start somewhere, but reality often shoots holes in our assumptions which is why i think it pays to "assume" a conservative approach to account for things unaccounted for. agree – it’s not just the math. math is just a tool that can be manipulated to say what you want. math, like most analytical tools, has assumptions. change the assumptions and the math works out differently. we are therefore biased on what assumptions we choose. “assume it is 100% matched and vested and getting 8% annualized return”, “assume the CC debt interest remains the same”, “assume i will be gainfully employed…”…..obviously we have to start somewhere, but reality often shoots holes in our assumptions which is why i think it pays to “assume” a conservative approach to account for things unaccounted for.

]]> By: Rick Francis http://www.obliviousinvestor.com/are-we-qualified-to-invest-on-our-own/comment-page-1/#comment-3761 Rick Francis Wed, 28 Oct 2009 14:19:24 +0000 http://www.obliviousinvestor.com/?p=5243#comment-3761 Losing the match is a really bad thing- it's worse than just missing the 100% gain- you also lose all the compound interest too. If you have a lot of time that will be a huge difference... If the CC is paid off in a few years it won't amount to a huge difference. OK I know what my next post is going to be... Compare paying off debt to investing in 401K. As for the math- I don't think it takes a huge amount of math to understand the basics of good investing. I would say you could get 90% from addition, multiplication and subtraction. I calculated out compound interest with those basic operations on spreadsheet but you could do it with just pen and paper. A lot of investing is knowing facts- like most actively mutual funds fail to beat their indexes and have higher fees as well. I find most people are pretty good with the greater than and less than concept. Finally, a LOT of results you can just look up- I suspect correlation coefficients are somewhere on the web... but if they aren't that's another post I could do. Now, if I only had time to make all of these useful posts! -Rick Francis Losing the match is a really bad thing- it’s worse than just missing the 100% gain- you also lose all the compound interest too. If you have a lot of time that will be a huge difference… If the CC is paid off in a few years it won’t amount to a huge difference. OK I know what my next post is going to be… Compare paying off debt to investing in 401K.

As for the math- I don’t think it takes a huge amount of math to understand the basics of good investing. I would say you could get 90% from addition, multiplication and subtraction. I calculated out compound interest with those basic operations on spreadsheet but you could do it with just pen and paper.

A lot of investing is knowing facts- like most actively mutual funds fail to beat their indexes and have higher fees as well. I find most people are pretty good with the greater than and less than concept.

Finally, a LOT of results you can just look up- I suspect correlation coefficients are somewhere on the web… but if they aren’t that’s another post I could do. Now, if I only had time to make all of these useful posts!

-Rick Francis

]]> By: Mike http://www.obliviousinvestor.com/are-we-qualified-to-invest-on-our-own/comment-page-1/#comment-3759 Mike Wed, 28 Oct 2009 13:52:56 +0000 http://www.obliviousinvestor.com/?p=5243#comment-3759 Brad: I'd rather not point out the particular comments in question. I don't want to "name names" as such, as my goal isn't to make fun of a particular person but rather to make an observation that people sometimes use some iffy math to make financial decisions. You bring up a great point about vesting. The commenter arguing that paying down credit card debt beats a 100% match didn't mention vesting either way. (Given that he didn't mention it but did mention other figures he used, I'd guess that he was assuming 100% vested rather than using an unnamed vesting schedule. But I could be wrong.) You're obviously right about there being no risk involved in paying off a credit card. I think a lot of people misunderstand though that the employer match is also risk-free (if vested, as you mentioned). I've never seen a 401k that didn't offer a very low-risk option (a money market, for instance). Brad: I’d rather not point out the particular comments in question. I don’t want to “name names” as such, as my goal isn’t to make fun of a particular person but rather to make an observation that people sometimes use some iffy math to make financial decisions.

You bring up a great point about vesting. The commenter arguing that paying down credit card debt beats a 100% match didn’t mention vesting either way. (Given that he didn’t mention it but did mention other figures he used, I’d guess that he was assuming 100% vested rather than using an unnamed vesting schedule. But I could be wrong.)

You’re obviously right about there being no risk involved in paying off a credit card. I think a lot of people misunderstand though that the employer match is also risk-free (if vested, as you mentioned). I’ve never seen a 401k that didn’t offer a very low-risk option (a money market, for instance).

]]> By: Brad http://www.obliviousinvestor.com/are-we-qualified-to-invest-on-our-own/comment-page-1/#comment-3757 Brad Wed, 28 Oct 2009 13:24:37 +0000 http://www.obliviousinvestor.com/?p=5243#comment-3757 I didnt see the entry in question at get rich slowly and I maybe missing something but a high interest credit card payment seems a mathematically better gamble because it is a sure thing. With a 401k 100% matching there are a lot more factors involved that maybe the get rich slowly posters were thinking but not saying. When does the matching get vested? Are their 401k holdings dropping in value so they are losing money (in the short term)? Are they near retirement so that their holdings are all bonds getting a mid single digit % return vs a potential 25% credit card debt? Short term stopping of retirement payments to pay off high debt is good if its short and a person quickly gets back to retirement. Its easy to forget or put off getting back to retirement saving or choosing low interest debt over saving. Could you give more context in the comments you are disagreeing with? I didnt see the entry in question at get rich slowly and I maybe missing something but a high interest credit card payment seems a mathematically better gamble because it is a sure thing.
With a 401k 100% matching there are a lot more factors involved that maybe the get rich slowly posters were thinking but not saying.
When does the matching get vested?
Are their 401k holdings dropping in value so they are losing money (in the short term)?
Are they near retirement so that their holdings are all bonds getting a mid single digit % return vs a potential 25% credit card debt?

Short term stopping of retirement payments to pay off high debt is good if its short and a person quickly gets back to retirement. Its easy to forget or put off getting back to retirement saving or choosing low interest debt over saving.

Could you give more context in the comments you are disagreeing with?

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