Busting Myths about Investing

Why Aren't You Investing?

What are the reasons that people shy away from investing?

There’s a perception that investing has to be this terrible, complicated thing that is going to take hours of my time and it’s going to be a painful process of self evaluation. People put it off, then they start to feel guilty about it, and when you feel guilty about something, you don’t want to think about it. So you put it out of your mind until maybe tax time comes around.

People don’t realize the importance of investing especially when you’re young. It seems like a problem that you can face next year and it will be just as good. Procrastination doesn’t seem to have an impact, and of course we know that’s not true. If you start saving when you’re 25 as opposed to when you’re 35 and you’re putting away the same amount each month, say $100 a month, you’ll end up with twice as much in your retirement. So it’s hugely important to start young. The impact is really great.

Is A Retirement Savings Enough?

Is a 401k or 403b all somebody needs or do you think that people should be looking beyond a standard retirement savings?

Those are a great way to start, especially if your company matches. That’s a real no brainer, because it’s free money. We should take advantage of those opportunities to get free money, because there aren’t many of them. Beyond that, it is smart to have an investment account. You should try to put away 15 percent of your paycheck and put that toward either your savings or your investments. You want to put it toward your savings until you have a little bit of a cushion built up. Then once you have that cushion, call it three to six months of your paycheck, then you can start to shift all over your savings toward an investment account. At that point you have your minimum. You want to start putting your money to work harder and that’s when it’s time to really start investing it.

Isn't Investing Too Confusing?

When someone goes to invest, there are so many sites and TV shows with constant tickers scrolling that don’t make sense to a beginner. How does Betterment make that easier?

We cut through that clutter, because a lot of it is just noise. There are all these competing ideas and products, and everyone’s trying to sell you the latest hot stock. It’s all just a waste of time and air, really. The fundamentals of investing are that you should be broadly diversified. About one percent of the American population has enough free time to focus on the market enough to actually be picking stocks and trying to beat the market. Even with those people, about half of them fail. So, for the rest of us it’s a terrible proposition to spend our time trying to be active about investing and picking stocks and parsing through all that information. The real thing to do is to diversify broadly, contribute regularly and don’t mess around with it.

Can You Invest with Debt?

How do you respond to people with substantially large debt? How are people able to balance debt and investing?

With credit cards, you definitely want to pay those down, because the interest rates on those can be exorbitant. With student loans, it really depends on your situation, and it can get a little bit complicated to think about. However, some student loan rates are virtually interest free if you’re lucky enough to get some of the government loans and so forth. And with those, it makes sense to actually invest rather than to pay those down a lot of times. If you’ve got a loan, a good rule of thumb is: if the interest rate is five to six percent or greater, you want to make paying it down a priority. If it’s less than that, you want to think about paying the minimum amount and actually putting that money to work rather than using it to pay down that student loan debt.

Is It Too Late to Invest?

What is some of your investment advice for people who are in their 50s, 60s and upward?

The most important thing is don’t just put your head in the sand. It’s something that you need to do today and start putting away as much as you can for retirement. Something to think about is how much money you might need in retirement. People often underestimate how much they’re going to need when they retire. A lot of people tend to think, ‘This year I spent $100,000 and maybe in retirement I’ll spend a fraction of that.’ But that’s not true. The reality is that there’s inflation and a lot of times our expenses as we age actually go up because we’ve got extra health care expenses and so forth. You’re not working all day, so you’re looking for things to do and there are more ways to spend money. So it’s good to keep in mind that the actual number you need to save might be even more than your present income.