4. Emotions and investing


Investing is an emotionally tumultuous process.  Your savings or investment account represents much more than just what you can buy with it.  It represents a life time of hard work, steadfastly putting money aside, and often, accepting immediate hardships for the hope of future comforts.  It also represents your ability to retire at a reasonable age, relax from the daily grind, and enjoy fulfilling activities.

At the same time, the state of the U.S. retirement system is, frankly dismal.  Any politics you may have aside, social security provides only a trickle of income, and jobs that offer a reliable pension or similar are nearly non-existent anymore.  As a result, most people prepare for retirement by saving their own hard-earned money and putting it into an after tax or tax deferred retirement account such as an Individual Retirement Account (IRA) or Qualified Plan (e.g., a 401K plan).

The investment options for those retirement accounts are also pretty dismal.  In the recent past, you could buy a completely safe investment like government treasuries or a five-year certificate of deposit at your local bank that would payout (yield) 5 or 6% annually with nearly zero chance you would lose your original investment.  Now, correspondingly safe investments yield about 1.5 to 2.5%.  And noted researchers like Robert Shiller think that these very low yields will continue into the foreseeable future(Robert Shiller is the author of Irrational Exuberance, which pretty much predicted the 2000 tech bubble.)

To retire on such safe investments alone you would probably need about $1.5 million saved at age 65 to produce an average annual inflation adjusted income of about $60,000 per year, which is slightly above the current U.S. median income.  This estimate is based on calculations using FIRECalc, which is a very useful tool for estimating savings needed to generate a given level of retirement income.  The estimate assumes an average life span of 85 years, very low investing costs, and an inflation rate consistent with past variations in the Consumer Price Index.  Under this scenario, FIRECalc estimates a 90% chance you would not run out of money, which of course means there is a 10% chance you would be destitute.  If you instead assume starting with less than $1.5 million, the chances of running out of money quickly go up.  A retirement based only on very safe investments may be an option for some people, particularly those who have saved a substantial amount or also expect to draw large social security benefits.  But many people won’t save this much, or will need a higher annual income.  Also, you might live longer than the average lifespan, which means you would need to live on even less income to avoid running out of money before you die.

Consequently, most of us have almost no choice but to gamble on riskier investments such as stocks, non-government bonds, or real estate, which could result in losing half our original investment or more.  Anyone who was investing during the 2000 tech bubble or the 2008 financial crisis knows how real these risks are, and that was just in the last decade and half.  See the article on Purpose for a review of the last couple decades of the stock market.

Given these limited choices, how do we navigate such an emotional and risky process safely and with a minimum of sleepless nights?  The next three articles discuss the concrete answers provided by a mindful investing approach.  These articles address both the emotional aspects of investing as well as the relationship between emotions and risk: