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.

The purpose of this blog is to help reduce financial illiteracy. Of course there is much more that you should do to increase your financial literacy, like read some of the books on my list of recommended investment books, and perhaps visit some of the investment web sites and other blogs to which I’ve provided links in the right column of this blog (if you’re reading this in email, you must visit my blog website to access the links).

I’m afraid there’s not much I can do about procrastination and inertia, except to point them out as serious issues. Financial planning and investing seem to be about the least interesting topics to most people I know. Unfortunately, continuing to neglect these activities is likely to have serious long-term consequences to your financial well being, as suggested in the quote at the beginning of this blog post.

Investing doesn’t have to be complicated, but it does take some effort to develop your investment plan and get started implementing it. After that, you shouldn’t have to spend much time on it. However, the more time you spend in the beginning, learning about investing and developing your investment plan, the more likely you are to stick with your plan.

If you don’t already have an investment plan that you are following, how about setting a goal right now to spend one hour a week developing your plan and starting to implement it? The key steps are:

  • Determine your risk tolerance
  • Decide on an appropriate asset allocation, based on your risk tolerance
  • Open the appropriate investment accounts, if you don’t already have them
  • Purchase the investments to implement your asset allocation
  • Save as much as possible and make ongoing additions to your investments
  • Periodically rebalance your investments to maintain your target asset allocation

Hopefully some of my blog posts will help with some of these steps, and reading a good investment book or two will help as well. If you have questions about any of the steps, I’m always glad to help.

Incidentally, you can now access my blog at, which hopefully is easier to remember than the old web address (which still works though). Feel free to pass it on.

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