Why Is Investing So Complicated?

A Harvard economist writing for the New York Times admits something most of us have suspected for years: investing your money is unnecessarily complex and off-putting. So much so that even he has been paralyzed by it.

But this is an ordeal for nearly everyone, whatever their training. No wonder many of us avoid thinking about long-term investments, especially for retirement. A recent survey by Charles Schwab found that most of us spend twice as much time choosing a car as we do choosing investments that are supposed to support us for years.

A relaxing retirement is supposed to be the reward for a lifetime of work, and yet it seems we must pass an entrance exam to reach it.

I’ve been wrestling with how we got to this point. Why is investing so complicated? And what should we do about it in our own lives, and as a society?

Investing isn’t what most of us do for a living. When a mutual fund company asks me what I want to invest in, it seems like the wrong question. It’s like a taxicab driver in a new city asking me, “Which route do you want to take?” Don’t ask. Just take me there. I paid the fare. Is it really my job to figure out the route to my hotel?

Most purchases have become streamlined and simpler over time:

The market seems to work well for consumers in other industries. The producers of smartphones, for example, compete fiercely to make simple and elegant user interfaces. If they can make it a breeze to interact with billions of lines of code, why can’t somebody simplify the alchemy of finance?

Is the answer financial advisors? Not necessarily:

In one study that I conducted with the economists Markus Noth at Hamburg University and Antoinette Schoar at M.I.T., we tried to quantify the quality of advice on the market. We did this by sending mystery shoppers to financial advisers. Our shoppers received very bad advice, by any measure. They were told to put their money into highly nondiversified portfolios that were also expensive. That’s the worst of both worlds: high risk and low returns. Perhaps most shocking was when our shoppers started with portfolios that were well diversified and inexpensive. Even in those cases, they were told to switch to options that were clearly worse.

Yikes! Ben and I consulted our financial advisor / accountant about what to do with the money we have in savings that is not going toward retirement, and she gave us sensible advice because she is a sensible, not-evil person. I guess before you trust anyone, you too should determine, perhaps after working with them for some time, that they are sensible and not-evil.

Our friend the NYT economist ends up choosing a target retirement fund, which is fine and dandy; I have one too, via Vanguard. (My financial advisor approves.) But that still doesn’t answer the question of what to do with any non-retirement money you may have that you don’t want merely languishing away in a savings account. Our problem right now is that the stock market is so perilously high it seems like it could well be headed for a fall, and CDs are still so low they aren’t worth it. What’s a good mid-range option, a place to park some money for a few years? Harvard economists, help!

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