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the best return you’re likely to make

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Have you ever tried to make your way across a crowded bar? Usually, the easiest way is to find a line of people already moving and tack on the end of them. Although this works a lot of the time, sometimes when you’re aiming for the dancefloor, you find yourself at the door instead because the line of people moving wasn’t headed in the right direction.

It’s similar with investing. It’s basically a given that stock markets act irrationally. When the stock market is rising, everyone thinks that buying is the right thing to do, and prices go up - beyond the point at which things are reasonable. When the stock market is falling, everyone thinks that selling is the right thing to do and prices plunge further. The typical novice investor intends to buy low and sell high, but in reality does the exact opposite; buying when everyone else does (when prices are high) and selling when everyone else does (when prices are low). Not really the way to get where you’re planning on going.

fear of investing is all around us

The stockmarket took a huge dive in 2008. I’ve (on paper) lost all the money I invested last year, and another 10%. It would be easy to let recent losses cloud my judgment and for me to lose confidence in the underlying basics. I’m certainly naturally inclined to retrench slightly and pull back from dangerous positions. After all, no one wants lose, and we certainly don’t want to throw good money after bad.

If you’ve looked at your pension recently, it’s certainly tempting to think that your future contributions would have better spent your wallet, or even in your emergency fund. But don’t lose out on one of the best returns you’re ever likely to make.

employer matching contributions

If you have a retirement account or pension through work where your employer contributes money if you do, then this should always be taken advantage of wherever possible.

At my place, if I contribute 2% of my earnings to a pension, then my employer will add 4% of my earnings. What’s more, this is all pre-tax. There’s no other investment where I get an instant 200% return. What’s more, it’s taken directly out of my pay so I never even miss the money.

Maybe your job isn’t quite as generous, but if there’s any contribution match at all on offer in your retirement account or pension, always take advantage of it if you can. Your future self will be really and truly grateful.

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5 comments for “the best return you’re likely to make”

  1. Now may be the best time to invest for the long run after all, but it’s natural to be fearful during these times. Also some people may need the money for now and don’t have excess to invest, although I agree with you.

    Posted by Craig | January 9, 2009, 6:02 pm
  2. Good post! I put in 6% of my salary and my employer puts in 8%, with what I saved in tax I can’t believe what a wonderful program this is! When I last had a statement, for 7 months I had contributed just shy of £875 and yet the total was around £2400. That is simply marvelous!
    p.s. thanks for the offer of help, I will email you later in the week, I’m still thinkking about what is right for me!

    Posted by Frugal Trenches | January 11, 2009, 12:28 pm
  3. I think you analogy of following people is very apt. I’m a neuroscientist so I’m very interested in how the human brain behaves in a crowd/herd situations, as well decision making behavior - especially when it comes to money. More about this sort of stuff in particular in The Stone Age Brain vs The Stock Market.Been learning a lot fro your archives, great site btw plonkee.

    Posted by Very Evolved | January 13, 2009, 2:17 am
  4. Yes, it is a crazy fact of life that people invest much more when stock prices are high than after a fall.

    Last year saw record outflows of investor money, despite the year ending with markets being the cheapest for years.

    Sure they could go down, but that was *more true* in 2007, just because they’d gone up so much.

    Still. I’m a PF blogger and I still have to check my own thinking. It’s no surprise ordinary people follow the crowd / conga chain. :)

    Posted by Monevator | January 14, 2009, 2:29 pm

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