I have been thinking a lot about this issue of how to make investing simpler. I hear from teachers that this is a real pain point for them. I can see in the NGPF podcast stats that the most popular guests tend to be conversations about investing (Mike Finley, Jonathan Clements and Vanguard’s Jim Rowley to name a few). Then this weekend the lightbulb went off. I was heading to the coast listening to Charlie Ellis on the Masters In Business podcast (kinda dorky I know). Those of you not familiar with Charlie Ellis, he is probably the best investment management thinker you have never heard of. Charlie has played a role in two of the juggernauts of modern day investing, the Yale endowment and Vanguard Investments (the king of indexers just crossed $4 billion (I mean TRILLION!)). Oh, and he was an early investor in Berkshire Hathaway too (Warren Buffett’s company)!

During this podcast, he was discussing the importance of 401(k)s in light of this era of do-it-yourself retirement (no pensions and minimal Social Security). He also talked about the bad decisions that most people make given their lack of familiarity with investing OR the bad advice that they receive from so-called advisors. When Barry Ritholtz (the interviewer) asked what “nudges” Charlie would recommend to improve decision making, he described what he thought the default option should be for all participants in 401(k)s (you would have to opt out to choose a different solution):

• Auto-enrollment: all employees automatically signed up into the company’s 401(k) plan and saving at a rate to take advantage of the company’s full match
• Auto-escalation: as their salary increases or they receive a bonus, their contribution to their 401(k) also increases
• As for investment selection in a 401(k), he recommends a target-date fund that corresponds to the expected retirement year (but be sure to watch for fees!). We posted data about target-date funds back in 2015, when they constituted about 50% of the new money going into 401(k)s. I have to believe that percentage is only increasing.

An approach like this allows you to go much deeper on a narrower set of topics compared to the typical investing unit that might be much shallower on a wide array of topics.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.

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