Wednesday, October 20, 2010

Financial Illiteracy, Procrastination and Inertia

"... it is difficult to make wise decisions about retirement savings and investment. The mistakes people make about their retirement savings have been attributed to financial illiteracy and to a number of psychological biases: misperceptions of risks; procrastination; inadequate self-discipline; inertia; and overconfidence, which leads most active investors to the illogical conclusion that each can outsmart the others." This quote is from The Squam Lake Report: Fixing the Financial System, a new book based on the work of 15 of the world’s leading financial economists. I’ve highlighted in bold the points I want to focus on in this blog post.

Monday, October 4, 2010

Ally Bank 5 Year CD

With interest rates so low, one of the best deals for fixed-income investing in a taxable account is a 5 year CD from Ally Bank. One advantage of Ally CDs is that the penalty for early withdrawal is only 60 days of interest, as compared to 6 months to 1 year of interest at other banks and credit unions. Currently Ally Bank doesn’t offer CDs for IRA accounts (although they plan to in the near future), so the 5 year CD I’m recommending only makes sense if you have quite a bit of money in a taxable account. Following are some more details about why this CD might make sense for some of you.

Friday, October 1, 2010

A Single Fund Solution

If you can’t find the time, interest or energy to learn much about investing and to manage your investments, perhaps you would be interested in investing in a single mutual fund that will provide broad diversification, and will be appropriate to invest in for the rest of your life. Types of funds that are intended to meet these goals are known as target-date, target-retirement, or life-cycle funds.

In general, target-date funds gradually lower risk by reducing the allocation to stocks each year. This is consistent with the widely recommended approach of taking more risk when you’re young, and decreasing risk as you get older. As with most other mutual funds, my favorite provider of this type of fund is Vanguard, and they are in the process of making some changes to these funds that make them even more attractive from my perspective. I’ll use Vanguard’s Target Retirement funds to illustrate how target-date funds work, and why they may be an appropriate investment for people who want a low-maintenance, prudent approach to investing.