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This AIM chat made me clench my fists

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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Ramit: yes, thats correct, for your INTEREST only if withdrawn early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: 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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  1. 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.

  2. 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.

  3. 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..

  4. 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.

  5. 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. Dispite probable upcoming recessions and depressions, and dispite the knowledge that no empire lasts forever, I think it’s more likely the market will continue for the next handful of decades, which at least for me is all it needs to last for.

  6. 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.

  7. “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.

  8. 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.

  9. 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.

  10. 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).