Invest Wisdom

If you’re coming from the Carnival of Personal Finance at Greener Pastures, welcome! I hope you enjoy this post.

Invest Wisdom is all about helping ordinary people invest better. You’ll find that my take on many investment issues is quite different from your typical PF blog. Look in the right-hand sidebar to see some other things I’ve written recently. And please subscribe if you like what you see.

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Since starting this blog, I’ve paid more attention to other personal finance blogs around the web. Recently, I watched a back and forth about whether debt reduction requires laser-like focus or a more flexible approach. As I read the writers’ personal stories of empowerment and triumph, it occured to me how different most personal finance issues are from the process of investing.

You see, I don’t think of this as an empowerment blog. This stuff is about as far from motivational as you can get. But empowerment does have a place in most personal finance issues. A guy with $10,000 in revolving balances on his credit cards knows that he should spend less money (or earn more) to pay the debt down. He just needs a good kick in the pants or pat on the back to get the process started and keep him focused.

That’s why commenters like Suze Orman are so effective at what they do. They use motivators like “Why do you do this to yourself?” or “You’re better than this!” to either scare someone from a mistake or empower them to action.

But when I hear people using the same emotion-laden words to address economic or investment issues, I start to feel a little queasy. Today, Clark Howard, an author and personal finance radio host, published a piece about the rising dominance of China as an economic power. He noted our indebtedness to the superpower and compared fears that we’ll become subservient to them to the fears that Japan was going to take over in the 1980s. His conclusion: “But we will be fine because we have something they don’t have: We have freedom. And the power of that freedom is unbelievable. To do what you want, say what you want, live where you want.”

Call me crazy, but I don’t think freedom is going to repay trillions of dollars of debt to the Chinese or shift our economy from one that buys things from importers to one that makes things to sell to the rest of the world. (In context of the story, he doesn’t mean free markets—this is more your freedom of speech, I’m-proud-to-be-an-American kind of freedom.)

My favorite emotion for an investor or an economist is this: nothing. When I invest, I don’t want to feel good about a decision. I don’t want to be afraid of a decision, frustrated at a decision, and certainly not excited at a decision. I want to be about as dispassionate as I can possibly be and use only objective criteria in making the decision.

I’m convinced that this is why most people are lousy investors. We got emotionally excited about stocks and lost 41% last year. We became fearful of stocks and missed the recent 35% run up.

In short, the same inspirational talk that got you to take the major, positive steps to pay off debt, start 401(k) contributions, and open a Roth IRA will inspire you right into making poor investment decisions if you’re not careful.

This is why passive investing is the right choice for most people, even though it might not be the best choice that could be made if, like Data from Star Trek, we could just turn our emotion-chips off. (Sorry for the dorky Star Trek reference.) According to a recent study, investors lost 7 percentage points of annual return over the last 20 years by entering and leaving the market at inopportune times.

If you have trouble keeping your emotions in check, the best investing decision you’ll ever make will be to make as few decisions as possible. Set up automatic investments for your 401(k) and IRAs, set an allocation between stock and bond index funds once a year, and pay attention to your investments as little as possible. Yeah, I’m getting a little tired of writing and reading that same old advice. But it’s more prudent than “inspiring” you to make active investment decisions.

— Joe Light