Thursday, September 11, 2014

Forget You Own Investment Accounts ...

... and get rich.

... On Bloomberg Radio, Barry Ritholtz talked with James O'Shaughnessy of O'Shaughnessy Asset Management.

Ritholtz and O'Shaughnessy spent much of their discussion talking about the ways people screw themselves when investing, because nothing gets in the way of returns quite like someone who thinks they have a great idea.

O'Shaughnessy discussed a number of interesting analyses he had done with regard to the length of holding periods (spoiler: the shorter you hold a stock, the more likely you are to lose money) among other things.

But O'Shaughnessy relayed one anecdote from an employee who recently joined his firm that really makes one's head spin.

O'Shaughnessy: "Fidelity had done a study as to which accounts had done the best at Fidelity. And what they found was..."

Ritholtz: "They were dead."

O'Shaughnessy: "...No, that's close though! They were the accounts of people who forgot they had an account at Fidelity." ...

Think about it. If you don't remember you have money stashed in a boring index fund, you won't sell the boring fund when it goes down. (As it invariably will). So you don't end up "selling at the bottom."

Case in point: A couple of decades ago, I put little bits of money into a Total Stock Index fund for my youngest son. When he was ten, I stopped putting cash in. At that point, the total of the account was eight or nine thousand dollars. I stopped putting more money in because the family didn't have money to spare, but I didn't take anything out.

Essentially, I forgot the account existed.

So now it's fourteen years later, the ten-year-old is an adult, and the forgotten mutual fund? It's now worth $33,000. And this money total comes after a couple of market crashes, coupled with total neglect.

I'm telling you, the best way to grow your wealth is to put a chunk of money in a broad-based index fund and develop amnesia for fifteen or twenty years. You'll be pleasantly surprised.


Kevin Koch said...

As always, you speak the truth, Steve. I had $15 grand in an investment fund that I didn't even know about once -- a 403(b) from an early job. It sat there for almost 10 years before I realized what it was. Unfortunately, it didn't go up much, because it had defaulted into a money market account. If it had been in a stock index fund, it would have more than doubled in that period. I'd made an ignorant decision in my initial paperwork with HR, and forgot about it. That ignorance cost me $20 grand in lost earnings.

When I woke ap and shifted that money into a stock fund, the market promptly dropped 30%, so it had less than when I'd first earned it 10 years before! I finally got a clue and shifted it all into a rollover Vanguard account (VTSAX), and despite the missteps it's now worth a decent chunk of change, despite 2 more market downturns.

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