Thursday, April 4, 2013

Self-discipline and the good life

From You Are a Terrible Investor and You Should Stop That by Megan McArdle.

Another list for good living. Or rather for good retiring.

McArdle is following up on another writer's comments about those who try and game the market.
And yet, there is an easy way to avoid this, if you follow three simple rules:

1) Save at least 15% of your income
2) Put the money in index mutual funds
3) Leave it there until you retire.

This is proven, with the power of economic science, to be the best way to retire comfortably. And yet, so few of you do this. When I suggest that you should save more, many of you write me emails implying that this advice is only slightly less ridiculous than suggesting that you move to Cuba and become a tuba player in Xavier Cugat's band.

Then, because you haven't saved enough, you become very anxious about your investments. You can't just sit back and get what the S&P is returning, because that's not nearly enough to retire on! You need to actively manage your funds for higher yield.

Unfortunately, almost none of you are the kind of stock pickers who can do better than the S&P, year in and year out. (Don't feel bad: neither are the professionals. On average, after you account for management fees, actively managed mutual funds do somewhat deliver somewhat lower returns than you could get by just throwing darts at a list of stocks.)

In fact, as Arends points out, many of you are doing even worse than that, because you buy high and sell low. Markets are herd phenomena, and you should never forget that you are part of the herd. When everyone is stampeding into a stock, that's the worst time to buy, because it means that the price is probably too high. But that's when you're going to want to buy, because--momentum! Plus it feels safer when all of your neighbors are doing it.

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