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How to put your long term investments on autopilot

In the US, pensions are rare for most workers, and those who do want to save for retirement are encouraged to use employee funded plans such as 401Ks. The problem that most investors have is that most of them are not professional investors. In fact, most are not even casual investors, and often do one of either two things, make no decisions at all, or leave the decisions to some kine of financial expert.

Doing nothing is not a good option, and leaving decisions completely to others is a better idea if the financial advisor is charging a minimal amount for their services. One company that takes the latter approach is Wealthfront (www.weathfront.com), which is an automated investment service that manages a diversified, low-cost portfolio of index funds.

Wealthfront makes it easy for investors who are willing to do a minimum of work to track their investments by creating personalized online investment account that is accessible anytime and anywhere from your desktop, tablet, phone, or other mobile device. The company supports the following types of accounts:

– Individual, joint, trust, & LLC taxable accounts
– Traditional, Roth, & SEP retirement accounts (IRAs)
– 401(k) rollover accounts
– 501(c) accounts for non-profit institutions

What are the Wealthfront investment options?
Wealthfront uses exchange traded funds (ETFs) that track indexes for the 11 major asset classes. These kinds of broad, market based investments historically have been more consistent than individual stocks. Their analytical process can also provide investors with reasons why a particular ETF was chosen.

How much does Wealthfront cost?
Wealthfront requires a minimum of $5,000, and charges no fees for the first $10,000. After that, the charge is 0.25% per year. There are no additional fees for their service, and no trading commissions. For A $100,000 investment, the annual costs would be $225 (0.25% of $90,000).

While investing with Wealtfront is not like putting your investments completely on autopilot, it can take most of the work out of your investing decisions. Interested investors should visit Wealthfront.com and evaluate their service for themselves.

Financial literacy impacts decision making

Research by the US Federal Trade Commission shows that financial education affects financial decision-making. Failure to plan for retirement, lack of participation in the stock market, and poor borrowing behavior can all be linked to ignorance of basic financial concepts.

Some of these findings, from the 2008 paper Financial Literacy: An Essential Tool for Informed Consumer Choice? by Annamaria Lusardi, may seem quite obvious at first glance. For example, the author points out that those who demonstrate even a basic understanding of relevant financial topics are much more likely to have planned for retirement. These are not sophisticated topics, but basic things such as knowledge of interest compounding and the ability to perform simple mathematical calculations . Skills like these were shown to be among the strongest predictors of successful retirement planning.

To appeal to the average person, who may not have had a lot of prior exposure to financial topics or investment experience, the study suggest a social or even a psychological approach to financial education, for example exploiting “teachable moments” like the beginning of a new job, in order to get a person to think about taking action when their minds are open to new ideas about how financial decisions may affect their lives.

While the points raised by this study are reasonable, the challenge faced by society, even wealthy countries, is vast. Since the late 1980s when there were significant changes in laws regarding retirement planning, companies were much more free to move from traditional defined benefit plans like pensions to defined contribution plans like 401K plans that shift the responsibility of planning from the corporation to the individual.

While individuals and organizations with high levels of financial sophistication, such as firms specializing in industry specific areas such as chemicals m&a experts can easily manage rather exotic financial decisions, the average person has a much more difficult situation. Financial instruments have become increasingly complex and individuals are constantly being bombarded by the investment industry with new and financial products. However, most individuals are not well equipped to make financial decisions.

The study showed that most individuals cannot perform simple calculations and lack knowledge of basic financial concepts. Knowledge of more complex concepts, such as the difference between bonds and stocks, how mutual funds, and how to estimate the value of an asset is even rarer. Financial illiteracy is widespread among the general population, and particularly evident in some demographic groups that happen to also be overrepresented among the poor and struggling working class, such as women, African-Americans, Hispanics, and those with low levels of formal education.

Retirement and Other Concepts and Traditions

I’m a great fan of The Div-Net, a blog on dividend and value investing. Not being as knowledgeable about the topic as I want to be, I find the posts there to be quite educational.

However, in a recent post titled “How much money do you really need to achieve financial independence?” I found something to which I objected. Who gets to define financial independence?

It seems silly, but there are a number of concepts we take for granted. Retirement is one of them. We’ve been sold a concept of retirement. It’s not an entirely objectionable one, but it does ignore some factors.

Retirement for most people is an end to work. A chance to get out of the rat race. However, this concept ignores several important facts.

1. Some people like work: it might seem crazy, but often times people don’t mind their jobs, or even might like them. Work provides a reason to get out and socialize with others. It gives you a feeling of achievement, and lets you spend the hours of your day in a way that lets you feel reasonably content.

2. Work makes money: Saving for retirement can be a challenge. Working into your retirement can help make that challenge less stressful.

3. Work comes with benefits: Insurance, sick leave, and everything else can cost quite a bit. If you have a workplace that can provide them, this can aid your retirement plan immensely.

Really, the only mandatory thing is that you must plan for your retirement, and planning for your retirement includes defining exactly what you want your retirement to be. Will it be working full-time, part-time or not at all? Will you start your own business or travel the world? These are the decisions that define your personal financial independence, and everything else must follow them.

As a society, these concepts are framed and taught to younger generations. We are taught that diamond rings are necessary for engagements, that weddings need to be catered and that retirement needs to be without working. These traditions benefit the companies that fulfill them more than they benefit you. If you do something, do it because it means something to you, not because a commercial told you to retire at a certain age.

Question these conceptions. You might be looked at a little oddly by people all around you, but it is far better to plan your finances around things that are meaningful to you, rather than just another method of “keeping up with the Jones”.