Comment on Open Thread: April 2010, Part 2

Mon, 19 Apr 2010 17:12:37 GMT

I don't believe they are. The vast majority of people I see investing and saving do so in a proactive manner, choosing on a whim, and with a risk horizon of less than a year. They pull out when the market goes down and pile on when hot tips become common ("Real estate can't lose!"). Even the big firms are doing a significant amount of trading and reformulating on a daily basis (evidence: financial "crisis").

Nice stereotype, but I didn't do any of that, and still lost a lot from the time I started investing (mid '06), despite concentrating on low-cost index funds (to the extent permitted by the 401k). As did anyone else who started in the decade before that.

Keep in mind, there's a certain cognitive capture going on here: in the popular mind, long-term saving is equated with using the 401k/Roth options, which require you to invest in a very specific class of assets. Even with all the whimsy you refer to, that's building in an unjustifiably low risk premium that has to change eventually.

And if you're ready to say that IRA promises will be broken (which I also consider a good probability), then your "infinite banking" scheme is even less likely to remain stable, as they're backed by private companies rather than the US government.

Wha? What "backing" are you referring to, and is your comparison apples-to-apples? The government doesn't "back" IRAs, it just has a promise they will have certain tax privileges. The assets in the IRAs, where it gets its value, are managed by private companies, just like for mutual whole life insurance (which are member-owned if that matters). Yes, the government could lift their tax privileges too, but this would require breaking an even stronger, longer tradition of not taxing life insurance benefits, which is the (ostensible) purpose of these plans.

ETA:

I put my trust in the people who seem to understand what's really going on, like Warren Buffet, who says that a passively managed Index Fund is the way 99 percent of people should invest.

Buffet hasn't actually worked out the nuts and bolts of how to get the meaningful diversication you need, starting with much smaller sums than he has, and adhering to account minimums and contribution limits. That advice seems like more of a vague pleasantry than something you can benefit from. And, it's not what he does.

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