Wednesday, May 13, 2015

The cost of sofas and mutual funds

This is the original and longer version of the blog I wrote for the Wall Street Journal. You can see the posted blog at:

Starting out as an assistant professor more than 20 years ago was truly exciting, even though the move was full of problems and it took months to settle into a new place. The day I showed up in the Human Resources office to enroll in health and pension plans, I was handed a bunch of brochures and asked to fill out a stack of forms. I spent most of the time focused on the health plans and their varied coverage.
When I turned to the pension plans, I had to choose among three providers and a long list of investment funds, from money markets to stock funds. I am not exaggerating when I say I took less time to choose where to put my retirement savings than I did to buy a sofa that morning. As an economist, I thought I should know about investment. I selected a global stock fund, looking at nothing else but where it was invested.
Months later, my colleagues in the economics department told me about the Supplementary Retirement Account (SRA) that the college offered. That’s where I could put money, tax-free, for retirement. Signing up for it was extraordinarily cumbersome. I needed my employee ID (a number I still cannot remember, let alone find easily) and was rushed to fill out all of the information in 20 minutes before the online system closed for security reasons. It took me several attempts to sign up and, again, little attention was devoted to where the money was invested.
I blame the harsh life of an assistant professor that I paid so little attention to my retirement savings and investment decisions. It was not until I received tenure and started my research work on financial decisions that I revisited what I had done with my personal finances. Changes were much needed. I began contributing the maximum amount to the SRA, I opened a Roth IRA and I moved all of my savings from high-fee international funds to index funds and built a more diversified portfolio.
Smart choices matter in finance. Small investment mistakes we make early in life, such as ignoring fees or failing to take advantage of tax-favored investments, compound over time and become large. I tell my investment-choice story to students in the personal finance course I teach to show them that finance truly is personal—and we must make time for it. I still have that sofa I bought in my first year as an assistant professor. If I had taken time to compare mutual funds in the same way I compared the cost of sofas, I would have the money today to refurnish my entire house.