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Smart Shortcuts for the Good-Enough Investor

Time is limited and information overwhelming. Shortcuts and rules of thumb can help in life--and investing.

Sarah Newcomb 05 November, 2019 | 10:22

It’s a fly ball heading your way. Do you do calculus to find out where it will land? Of course not. You fix your eyes on the ball and run. If you adjust your running speed so that the ball stays in the same place in your field of vision, then you and the ball will meet in the same place at the same time.

Lots of choices in life are like this. We either don’t have the time or we don’t have the information available to make a decision that is exactly right, so we rely on rules of thumb or mental shortcuts to get the job done. In short: Shortcuts work.

When it comes to managing our money, most of us don’t need an advanced degree or a sophisticated strategy to make solid decisions. For example, knowing exactly how much you should save for retirement involves a lot of things you may not yet have considered such as what your health may be like in your 70s, where you want to live in your 80s, or how many grandchildren you’d like to help put through college. The rule-of-thumb answer to the question is that by the time you are 30, you should have about as much as your annual salary saved. By 40, you should have twice as much, and four times by age 50. The rule is not perfect by any means, but it’s good enough to get you going, and following the rule of thumb is certainly better than letting the complexity of the problem keep you from getting started.

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About Author

Sarah Newcomb

Sarah Newcomb  Sarah Newcomb is a behavioral economist with Morningstar.

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