Yesterday a bunch of you left comments and sent me emails about what’s going on in the economy. Here’s a quick video I did to answer some of them. Check it out and see my notes below.
0:01 — Intro: We’re going to talk about what’s happening with the economy, asking the right questions, what you can do with your money. PS–It’s my first time doing video for this site, so please cut me some slack!
0:12 — Lots of questions: “What’s happening?” “Who can I blame?” “Why is the government bailing companies out?”
0:45 — Most of the questions are totally irrelevant!.
What do we know?
1:11 — Your money is generally safe: Money in savings accounts is insured up to $100,000 per account, and money in brokerage accounts is insured up to $500,000 (with some nuances). However, this doesn’t mean money in your portfolio is insured against losses in the stock market — if your portfolio is down 20%, it’s really down 20%. That’s why investing is “investing,” not “picking a sure thing and profiting a lot.” SIPC insurance means it’s insured against the brokerage firm going belly-up. Learn more by reading this article.
Worry about the things you can control
1:47 — We misjudge risk and worry about stuff in the news — as opposed to the real risk. Let’s say you’re worried about not having enough money. Which is more likely?
1. You’ll run out of money because you lost it all in a tumultuous stock market
2. You’ll run out of money because you didn’t save enough, spent money on stupid stuff (vs. spending consciously), and didn’t properly diversify your assets
OF COURSE it’s the second, but because of the availability heuristic, we tend to overweight what’s easily accessible in our brains (i.e., we’re all worried about what we read in the papers right now).
Remember, we are cognitive misers and can only pay attention to a few things, so take advantage of that. I’d rather focus on the very real risks that have caused millions of people before me to not have enough money to sustain their lifestyle — that is, not saving enough — rather than worry about a macro-economic topic that’s in newspapers. Sure, it’s important, but I can’t control anything at the macro level. At the micro level, I can control everything. (Note: Here’s a good book on judging risk.)
What you should focus on
2:12 — Save more — single-best thing you can do to mitigate risk
(No time stamp.) I forgot to mention this in the video, but please don’t fall prey to the myth of financial expertise: Nobody has The Answer about how bad this will get and how long it will go. Experts have been trying to predict this for years — remember in 2007 when they said it would “probably be fine by the end of the year?” — and they’re still trying. And failingDon’t try to time the market. You’ll fail too. Just pick a regular, consistent investing strategy and optimize for the long term.
2:23 — Tweak your asset allocation
2:42 — Stop asking stupid questions!
2:52 — Best things you can do: Forget about macro-stuff and focus on your own finances. Save more, do a kick-ass job at work and get a raise, or even start a side business.