Wednesday, April 22, 2009

Investing Paralysis

I’ve run into more people than usual lately who seem interested in talking about money and investments. These conversations often end in roughly the same place. Here is a shortened version:

Polite Person: “So, what do you do?”

Me: (list a few professional activities) “... and I write a financial blog.”

Polite Person: “Oh, really? So, what’s going to happen with stocks/interest rates/the economy?”

Me: “I don’t know, and I don’t believe that anyone else knows for sure either.”

That’s usually as far as it goes. I try to avoid talking money to people who aren’t interested. Lately, several polite people I’ve met have continued the money talk:

Polite Person: “My money is in mutual funds with Fund Company X? What do you think of them?”

Me: “They are charging you about 2.5% per year in fees. In 30 years, more than half your money will be gone. Instead of a million dollars for retirement, you’ll only have $500,000.”

The conversation then goes to the advantages of low-cost index funds, but ends as soon as I explain that this polite person can’t just instruct his financial advisor to switch him into low-cost index funds because the advisor won’t collect commissions that way.

The prospect of opening a discount brokerage account and doing the buying and selling themselves seems to be a deal breaker. Whether the problem is laziness, fear, not believing me, or not trusting themselves, they seem unwilling to make a change even though it will save thousands of dollars each year.

I don’t give anyone a hard sell, partly because it doesn’t work and partly because I don’t know their business well enough to give advice. However, I find it interesting that some people seem interested, understand what I’ve said, believe that they can save a lot of money, and yet they remain paralyzed.


  1. Hi,

    A few possible causes:
    - laziness, both to make the change and to keep track of things moving forward. Much easier to have someone do it for them.
    - having someone to blame, or fear of taking on the responsibility for one's retirement.
    - not wanting to "settle for average" (despite the evidence on fund returns versus investor returns)
    - in some cases, a genuine belief that active management is the way to go. Hey, I disagree, but people are free to have their opinions.

    Those are a few to get started...

  2. I believe it fear:

    They fear a learning curve.

    They fear picking wrong fund, not understanding how indexing works.

    They fear facing financial planner with the accusation that he/she is taking far too much in commissions.

    They fear having no one to blame (as Fernando said).

  3. Please stop doing this. I own shares in IGM, TD, BNS, RY, SLF, and MFC.

  4. Fernando: Not wanting to take resposibility is a good one. The passive versus active debate takes place among a small minority of investors. I find that most people have never heard of passive investing and don't know what indexing is.

    Mark: Fear of confronting their financial planner is a good one. I think you've inspired tomorrow's post.

    MG: Don't worry. So few people seem to act on the knowledge that passive investing is better that you have nothing to fear from me in your "high MER" company investments.

  5. But it is sooooo hard I hear!

    Investing in the Mutual Fund companies is another idea, or make your own fund and then charge 2.4% MER and claim you are a "Low Cost" Mutual Fund.

    I wish someone would tell me what the official font is for sarcasm.

  6. I have been advocating that CIBC Index Funds is the right thing for some people who qualify for for the MER rebate and want to work with an individual not a discount brokerage.

    There is still a trailing commission of .15% to .25% paid to the brokerage. There is no transaction fees.

    I believe most brokerages offer CIBC Index Funds. At least, bank based one do.