Sunday, February 18, 2007

The conservative fatal flaw (gasp!) of this liberal couple

As I am spending more and more time thinking about our finances, and plotting how to best plan for the future, I have come to the inescapable conclusion that the major barrier between us and financial success is the fact that we're total 'fraidy cats. Or, in the parlance of economics, we are extremely "loss averse."

My husband and I have many positive qualities when it comes to financial decisions: we are happy to live below our means, and have never had problems with overspending; we are relatively similar in our approach to money, which has saved us so far from polarizing around saver/spender roles; we are both strongly swayed by rational arguments, so we are usually able to agree on a course of action once we've discussed an issue; and we are good at talking to each other about the emotional and logical components of money stuff.

However, we are also similar in being naturally very loss averse. As I have been reading more and more on the subject, I recognize and (I think) am internalizing that the fundamental basis of financial growth is taking an acceptable amount of risk to reap larger benefits. However, even as I slowly convince my emotions that we are taking unbearable "losses" by keeping so much of our money liquid instead of allowing it to grow, we as a couple have much more inertia to overcome on this front, since my husband is even more naturally loss-averse than I am.

In my next post I am going to brainstorm ideas to help us get more comfortable with risk. This blog is already a great tool, because it will force me to be accountable month by month for how fast our net worth is increasing, and hopefully face the consequences of our conservative strategy. I would really appreciate any advice or ideas that you might have to help us get into a better mindset so that we can make good financial decisions. Help me blogosphere.... You're my only hope!

: )


Wanda said...

Hi NewGirl,

Welcome to the pf blogosphere! It's great to see another twentysomething blog. You might start out with a broad, diversified index fund and then re-balance once a year (don't look at the ups and downs in between). It's less risky than holding individual stocks. Since you and your husband are both young, you have alot of time to ride out the market.

NewGirl said...

Hi Wanda! Thanks for the comment : ) I really appreciate the advice. I think not looking at the short term ups and downs is probably key. It takes discipline though not to check all the time. I'll practice....

JLP said...

Substitute the word "volatility" for the word "risk." When you are young, as you are, volatility is king! Money that you are putting aside for retirement SHOULD be invested heavily in diversified stocks (I would even venture to say that you should have NO bonds until you are in your 40s).

Keep your contributions high and consistent and DON'T check your balance on down days. In twenty years you will most likely be very happy with the results.

Don't let your short-term fears get in the way of your long-term goals.