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This AIM chat made me clench my fists

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Anger!!!

Friend: i just got into a long long discussion with these two guys, one is one of the smartest i know, they advocated not investing in retirement accnts

Ramit: yeah?
Ramit: whatd they say

Friend: yeah
Friend: they said they don’t beleive the growth rate will continue into the fture
Friend: they see the system as unstable
Friend: and likely to fail
Friend: they don’t think that your money will make returns over time, and they say investing is great…if you leave an out

Ramit: what does leave an out mean?

Friend: so investment accts = wait until 69.5
Friend: whereas they say don’t use retirement, instead just invest in reg marke

Friend: and be able to sell

Ramit: wow
Ramit: your friends are breathtakingly misinformed

Friend: i definitely disagree
Friend: why?

Ramit: there are so many reasons. let me attempt to itemize them:
Ramit: 1. they completely miss the tax advantages of retirement accounts. these are quite simply huge
Ramit: 2. there is an out. you can withdraw all your money anytime. in fact, you can withdraw your principal completely penalty-free.
Ramit: 3. “the market wont sustain itself” is based on…what? certainly not 70+ years of evidence
Ramit: 4. the market may not return the same. this is potentially accurate, although debatable

Friend: ok so
Friend: here is what they said
Friend: 1. Tax advantages are worthless if the market defualts, which they think is very possible, maybe probable
Friend: 2. they didn’t say anything, but you have to pay a large 10% penalty right?

Ramit: yes, thats correct, for your INTEREST only if withdrawn early

Friend: 3. they are basing it on all empires previously, so he says we have been only having growth b/c america is a superpower, what if you invest in Great Britain in 1750? after 70 years, your money would have been worthless. All empires fail, america will decline too

Ramit: wow
Ramit: so my argument is simple
Ramit: besides your Friends being stupid
Ramit: they base their whole thing on pie-in-the-sky arguments: “it’s probably that the market will completely default.” Really? why? what evidence? what are the risk factors of that happening? its extremtyly hard for a government this big to defaul
Ramit: worst of all, they basically put aside huge earning potential for this pie-int-he-sky potential that “might” happen

Friend: yeah
Friend: social secruity

Ramit: they are literally betting with their money that something so stupid would happen
Ramit: you said “tax advantages are worthless IF defaults. blahblah”
Ramit: thats like me saying:
Ramit: WELL ITS JUST ABSURD
Ramit: i cant evn think of an equivalent
Ramit: “its useless to get a college degree because jobs might just stop caring about them”

Friend: they expect, with the rise of other countries + change in social secrutiy, our country will begin a decline
Friend: maybe in our lifetimes, maybe not

Ramit: that is such stupid handwaving nonsense
Ramit: they have no data, just “hunches”

Friend: i guess

Ramit: i could just as well say that “ireland might become superpower #1 because its been so long”
Ramit: i hate that kind of vacuous nonsense
Ramit: the easy way to penetrate their BS is ask one simple question: “what is that based on?”

I am now thinking of adding a category simply called “Dumb” to this blog. Thoughts?

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33 Comments on "This AIM chat made me clench my fists"

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gerard
gerard
10 years 4 months ago

Why do I get the impression there was a bong in the middle of this discussion? And a Che Guevara shirt on one of these geniuses.

Ralph Brorsen
Ralph Brorsen
10 years 4 months ago

I’m no macroeconomist, but did you stop to consider they might be right? Just consider a) HUGE US decifit. b) We’re running out of oil.

Michael G. Richard
10 years 4 months ago

Hey Ramit, what happened to all the “how to” and tutorial posts? Do you have less free time these days? Just wondering, because I enjoyed those in the past quite a bit..

Ramit Sethi
10 years 4 months ago

Yes, much less time!! But I’ll be getting some new ones like that posted soon…I have a list of 18 new personal-entrepreneurship articles I’m doing. Thanks for asking, Michael.

mikshir
10 years 4 months ago
I’ve heard a similar argument before. A couple things I reply with: 1) If the entirety of the market defaults then there’s probably been some society changing or cataclysmic type event including revolutions, civil war, and, oh say, armageddon. In which case, you have a lot more to worry about than your retirement and any alternative to a retirement account probably just bit the dust too unless you can stiockpile and protect some precious materials. 2) You got to play the odds that have the best expected value which means you put your money on the event that’s more likely.… Read more »
frank
10 years 4 months ago

I would add that their dire predicitons make diversification outside of the US even more important. As for the market defaulting, they can use put options to mitigate that, albeit it is an imperfect and expensive way to do it.

Jay
Jay
10 years 4 months ago

“a) HUGE US decifit.”

Although somewhat disconcerting, our deficit to GDP ratio is on average for other industrialized nations (about 2:3). Although yes, something has to be done to curb it and at least stop its rate of growth, we’re no worse off than the rest of the world.

We have a huge deficit because we have a huge economy. Putting it in perspective sheds a whole knew light on it. Or, at the very least, makes the picture a little bit less bleak.

Jason Ellis
Jason Ellis
10 years 4 months ago

I would add another point to mikshir’s list:

3) Even if they are right, and you invest US Dollars in foreign investments, if the US goes belly up, what will thos US Dollars be worth anyway? Zero. So, assume that the dollars will be worth something in the future, and invest normally.

People like this kill me cause the amount of legitimacy given them is not proportionate to the evidence they can provide that what they are saying is true. “What if the sky falls tomorrow?” is not a good reason to drastically change your time-tested investment strategy.

Kieran
Kieran
10 years 4 months ago

Dude, you can use an IRA or 401(k) to invest in foreign securities. Even if our system crashes, your money is better off in an IRA than outside it.

Derek
10 years 4 months ago

Ramit I think you should just relax 🙂
Arguing is ALWAYS a waste of time.

Person1: I believe something.
Person2: I don’t believe something.
Person1: Well I’m right.
Person2: Sorry my friend I have a list of facts that says you’re wrong.
Person1: I don’t care.
Person2: I hate you.
Person1: Good, cause you’re stupid.

So you disagree with people, big deal, move on. If you were seriously clenching your fists that’s a good indication to let go because nothing constructive is happening.

Concentrate on other things that lead to a better result (like watering plants, or watching insects).

Grayden
10 years 4 months ago
There are a few scenarios in which the US economy could be in for a hard time. If OPEC decided to switch to the Euro as its standard currency for valuation instead of the American dollar, then the worldwide market for American currency would be shifted rather dramatically. As has already been mentioned, what happens when we run out of cheaply-recoverable oil? What happens when China and India get fully geared up to be economic superpowers and they start buying up more of whatever oil IS available? What happens when the US loses its top spot as the economic powerhouse… Read more »
Gualberto Diaz
10 years 4 months ago
As much as OPEC wants to switch over to Euro’s right away, it won’t happen. There aren’t enough Euro’s in print at the moment. To dramatically switch over from US Dollars to Euros would send the WORLD markets into chaos, not just the US markets. Major Central banks hold our currency as reserves. It’s in nobody’s best interests except for Islamic fundamentalists who only want to see the decline of the Western Devil for the Dollar to decline. Iranian officials have even stated that the petro exchange which was set to open this past Monday would be doing transactions in… Read more »
Anonymous
Anonymous
10 years 4 months ago

They have good points, bad points, and wrong points. The dollar will go down is a good point. Using the lifespan of nations is a terrible argument. And the 10% penalty was wrong.

Jennifer
Jennifer
10 years 4 months ago
Oy. Two points here: 1. There are a million different things to do with an IRA given a million different senarios. It’s up to individuals to critically determine the likelihood of each of these senarios and diversify accordingly. 2. If you have your IRA with a company like Vanguard, I believe you can always convert it to another fund penalty free if you are afraid that the immediate future won’t favor your current fund. Then, because these two guys that your friend listens to are obviously working on fear appeals and peripheal logic, you need to destroy any and all… Read more »
Dave
10 years 4 months ago

If the economy collapses, aren’t you sort of screwed anyway? I mean, if the economy collapses, the dollar is going to be worthless or everything will be worthless, so all those dollars you didn’t do anything smart with aren’t doing anything for you.

This is my problem with people thinking the world is going to end not doing anything reasonable with their money. Your money is useless if the world ends anyway.

Anonymous(e)
Anonymous(e)
10 years 4 months ago
Ramit, you’re wrong about something: You can only withdraw your principal without the 10% penalty if you put your money in a Roth IRA — and that too five years after you put it in. If your “retirement account” is a Traditional IRA or a 401(k), then you will have to pay the 10% penalty (with a few exceptions, such as buying a first home) if you withdraw your money. These Friends might have pie-in-the-sky arguments, but you might want to read up on some stuff that is going on in the world and actively threatening the US Dollar. Regularly… Read more »
Leon
Leon
10 years 4 months ago

Okay, can we get a good detailed article explaining IRAs and 401(k)s?

Especially from the perspective if you’re say, 20.

I’ve been hearing a lot about them lately, and I’m really confused.

They sound like a great deal, but I don’t want to put away money for 40 years.

Chris Yeh
10 years 4 months ago

For God’s sake, if the argument is that the US government will collapse (as another commenter has pointed out, you CAN invest in foreign securities in US retirement accounts–I’m heavily into overseas mutual funds in my IRAs and 401ks), I don’t think they’ll be in any position to levy 10% penalties!

Sometimes the stupid just need to be bitch-slapped with the flaccid mass of their own brainlessness.

greg
10 years 4 months ago
Markets have defaulted in the past, and people manage their wealth throughout, you just need to be sufficiently diversified, by not having all your money in a single basket of things like tulips. If the market defaults, it shouldn’t matter if you money is inside or outside a retirement account, it would still be worth nothing. Just ensure you see it coming, and invest in something appropriate, like gold or commodities if stocks look bad. At any rate, if the world had a complete market default, investing in general would be a waste, and the only good position to have… Read more »
ib
ib
10 years 4 months ago
hi ramit, i totally see your point and i agree. i have friends who feel the way the person you were conversing with does, and part of me even feels the same way at times. BUT to not prepare for the future is really stupid. most of us WILL get old and need to survive on something. unless they have a better plan, there are proven methods working for people and it would be dumb to not take advantage of any, no matter what the beliefs are. reminds me a little of Madame X’s (of My Open Wallet blog) father.… Read more »
entropy
entropy
10 years 4 months ago

It’s not totally inconveivable that the market will crash during our lifetime. IMHO l we are due to a 1930s style depression due to unsustainable debt and a looming energy crisis. However, I am not afraid of forces beyond my control, I am young and still feel investing 10% of my income into a retirement account. If we get to that point, I will have to face the challenges that arise.

cmadler
10 years 4 months ago
As several people have pointed out, this should not be a question of whether to invest in a tax-advantaged vehicle (IRA, Roth, 401k, etc) or in taxable assets. The question is WHAT you invest in. There are several very plausible reasons that we could see a major market collapse in the next 5-10 years: 1. Devaluation. The dollar has been gradually devaluing for several years. As this continues, capital begin flowing out of dollars and likely into Euros. 2. Debt. A very large portion of US debt is owned by foriegn governments (China, for example, holds quite a bit). If… Read more »
mila
mila
10 years 4 months ago

as Kieran and Chris and others have pointed out above, you can invest in a portfolio which includes a decent allocation of foreign securities – there are plenty of good funds offered by people like Vanguard

Sure, share investing won’t save you from “The End of The World As We Know It”, but if you’re planning for that, why bother with college, etc etc.

International diversification is about as good as you can rationally get in that sort of disater planning

Kien
Kien
10 years 4 months ago
I don’t believe in all the doom and gloom that people keep talking about because quite honestly a person who is smart enough can find a way to make money in any economy… even in anarchy. I personally have an investment thesis in case of doomsday which is to invest in GAG – Guns Ammo and Gold. But I still have my shares in tech companies because I’m not that pessimistic. Something that should be a concern as far as investing in 401Ks is related to the National Debt and was pointed out by Suzie Ormon who has a great… Read more »
Grumpy Old Man...
Grumpy Old Man...
10 years 3 months ago

Your friend also needs to learn a little history before he argues from it.

In 1750-1820 the UK had lost 13 of its less profitable colonies (the real money at the time was in sugar), but had gained Australia, de facto control of India and had knocked then previous superpower (France) off its perch, establishing what became known as Pax Brittanica. It was poised on the great age imperial expansion and had launched the Industrial revolution.

cellardoor
10 years 3 months ago
Fist clenching indeed… 1.Unless your friend is going to invest in assets that are non-publicly traded securities, why the hell wouldn’t he put the money in his retirement fund and invest it however the doom’n’gloomers want? So what if the US collapses — stick your IRA money in emerging market funds if you like. (The takeaway for me, isn’t that the US will or won’t collapse — just that the guy probably doesn’t know what he’s talking about.) 2.Unless maybe he thinks that a future administration will abolish the benefits on IRA’s and punitively tax them disproportionately — and even… Read more »
Colin
10 years 3 months ago

It is not true that you would have lost money in the British stock market over the long run, neither when their late 18th Century declned nor their late 19th Century empire. In fact, many economic historians argue it was good for the British economy to set its money-sucking colonies loose — sort of like the way the US would gain financially from giving Puerto Rico its independence.

Pablo
Pablo
9 years 6 months ago
I’ve been reading your blog since this past fall, but the points these gentlemen bring up are quite absurd. Like the first poster mentioned, there must’ve been a bong and a Che Guevara shirt somewhere when this conversation took place. Utilizing Britain as an example of an empire falling is the most fallacious of all the silly points these guys made. Look at the London Stock Exchange: it is now competing with New York in the financial world for supremacy as the biggest purveyor of global capital. Bloomberg, of all people, is frightened by the growth of the financial industry… Read more »
Kay
Kay
9 years 1 month ago

This intrigued me very much. I get each of your points.

rob
rob
7 years 9 months ago

@Pablo –
Couldn’t agree more, that one astonished me too. I think it’s a mindset here (America) that the american colonies *were* the british empire, and it all went bad for them when we became independent. I apologise on their behalf. I’ll invest my 1 pound into the iron industry at, oh, around the time of Henry VIII thanks.

Nathan
Nathan
7 years 9 months ago
Just because something hasn’t happened in recent history is not enough evidence to say that it can’t happen or even that it’s unlikely. While the economy always has it’s ups and downs, it seems like we are actually in a downward spiral because the government is only concerned with short-term fixes that bite us in the ass in the long run. And it’s not really their fault. They are just doing what their constituents want them to do. We are a country of spoiled children that want their problems fixed immediately, and if it leads to bigger problems, down the… Read more »
SK
SK
7 years 5 months ago

Hey .. I remembered reading this post so came back to it. Seems like your friends were on to something…. Do they have a personal finance blog I can subscribe to?

Bob
Bob
7 years 1 month ago

@SK: I get the impression your comment was tongue in cheek, so my comments are completely unnecessary. I think cmadler above was most on point – the points were cogent and well thought out and implied a high level of knowledge and understanding of the situation. The chicken little’s arguments were vacuous and their predictions still have not come true by a long shot. The market has already started to recover. A recession or even a depression is still a far cry from a complete collapse.

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