Scrooge Strategy

“I should research before opening an investment account”

7 comments — written on May 9th, 2006

From an IM chat with a friend yesterday:

Friend: i feel like i should do some research on what to invest in before i open up an account?
Ramit: why?
Friend: when i open the account, won’t i have to buy something?
Ramit: that is an interesting question
Ramit: no
Ramit: your money just sits there in an account
Friend: but the interest rate’s no good right?
Ramit: ok, so here’s the deal
Ramit: savings interest rates are largely bullshit
Friend: ?
Ramit: first of all, it’s 2%-4.5% / 12 to get your monthly interest rate
Ramit: for even 10k, thats not very much
Friend: hm
Ramit: second, in a money-market account, your money is sitting there earning a little, maybe 1.5 to 2%
Ramit: and then you can disburse it
Ramit: to stocks, index funds, etc
Ramit: so you dont want to create this barrier by saying, “i better research” cuz chances are you wont
Ramit: send some money
Ramit: let it sit there
Ramit: and once its there, its very very psychologically different
Ramit: you will treat it as “investment” money
Friend: and the money sitting there will prod me to do research
Ramit: YES

Please, be ruthless about removing barriers.

7 comments

Leave your own

  1. 1
    May 9, 2006

    K

    I find it a facinating quirk of human nature that the first concern of new investors is gettting the “best” return.

    Okay, right now, they’re getting no return.

    Heck, they have no money to get a return on.

    So concentrate on baby steps.

    I started with a money market fund.
    Yeah I got little or no return but I was just learning about investing then.
    By the time I gained the knowledge, I had a bit of money to play with!

  2. 2
    May 9, 2006

    alex

    Yes, barriers are insidious. For instance it is amazing how investing has no real grip on my time, until I have actual money on the line. Then I suddenly find the time and effort to do what it takes. Successfully saving is effectively half the battle. Somehow this adds new meaning to the saying “a penny saved is a penny earned.”

  3. 3
    May 9, 2006

    J.D. @ Get Rich Slowly

    People often spend too much time fretting over the optimal decision — which investment to make, whether to reduce debt with the “debt snowball” or the “highest interest rate first”, etc. — when the most important thing is just to act. Pay down the debt! Start an IRA! Any positive movement is better than nothing.

  4. 4
    May 9, 2006

    Eric Nakagawa

    I completely agree with this… many of my family members are either frozen by fear of not choosing the best choice — even when their current choice sucks, or choosing to act on what someone else suggests — just because they trust the person.

    I’m a firm believe in the … you don’t know until you go. Get up off your butt and start.

  5. 5
    May 10, 2006

    Mike

    If you buy and hold, there is really no need to research all the brokerage firms. Get a discount broker like Scottrade or Sharebuilder and go

  6. 6
    May 11, 2006

    Chad Smith

    I love your commentary on barriers and how people can be lazy. Keep up the good work. Was wondering if you might have anything to add to my discussion on investing on your own vs working with an advisor. I am specifically referring to mutual funds and the best custodian out there. See my blog for more info:

    http://www.twentysomethingfinance.blogspot.com

    Thanks.

  7. 7
    May 11, 2006

    baselle

    Another old saying:
    90% of everything is showing up. Works for your money, too.

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