One of the biggest peeves that I have is folks’ inability to listen to a problem description completely before leaping to a conclusion. Given I work with engineers, mathematicians and the like, they can generally be described as “problem solvers”, and they enjoy showing that they can get things done. Unfortunately, many times they jump to the wrong solution because they have not really listened long enough to figured out what the problem was in the first place (they have not taken the time to listen first and then synthesize a response after they have heard all the facts).
Let’s take a good financial problem, and see what conclusion you jump to?
Say you have a friend (Harvey) who is 52 years old, and he has realized that thanks to bad planning on his part he doesn’t have enough money to retire early (or possibly at all). He was hoping to have $3 million by the time he retired, and he haven’t even cracked the $1 million dollar mark in his RRSPs, and other investments.
A quick solution that I heard one friend blurt out was the following:
“Harvey, you are going to have to take more risks with your investments to try to compensate for the slow growth you are getting currently”
Seriously, this was actually a response, and on the face of it, it sounds like a possible answer, until you think that taking the existing moneys that you have and putting them in a more risky portfolio (with leverage, or something even more hideous) just means you could end up much farther behind.
Another comment was that Harvey was going to have to “beat the market” and of course the commenter knew of an advisor who has great success achieving this holy grail of investing. My guess is that this is where lots of investors end up; in the Beat the Market trap (as you can tell after 30 years I have seen many folks who thought they were beating the market but didn’t quite get it done).
Finally, I mentioned to Harvey that another solution might be to start saving more money now, and/or paying down debt faster and maybe altering his lifestyle so that he could have a larger retirement fund later. If neither was possible, then simply abandon the idea of retiring early, and just stay diligent in your saving plan.
Which idea makes more sense? Oh and yes the Jump to Conclusions title is a reference to one of my favourite movies Office Space.