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Recently, the New York Times Dealbook ran a piece on bitcoins which featured two of the Frugster’s favorite capitalism characters, Cameron and Tyler Winklevoss (who?), better known by their Zuckerbergian nickname “the Winklevii.” If you’re like me, you might be wondering what a “bitcoin” is. Good question. I’ve spent about an hour on the bitcoins site and I am thoroughly confused. According to Bitcoin.org, bitcoins are electronic currency with no underlying central authority. Normally, I wouldn’t bother to spend much time discussing what many people think amounts to another Dutch tulip bubble, but for bitcoins, I’ve decided to make an exception in the interest of discussing self-directed investing in 401(k)s.
In a previous post, you may remember that I offered my two more important tips investors should consider when thinking about 401(k) fees and investments:
1. Do your research on each investment option before you invest
2. Never invest in something you don’t understand.
Well, thanks to the current curiosity and media attention over bitcoins, I’ve decided to add a frugal corollary to Rule #2. The Frugster calls it the 30 Minute Investment Cap, and unlike bitcoins, it’s a very easy rule to understand:
Never invest in something you don’t understand after 30 minutes of research.
I’m not saying that all your research be completed in 30 minutes - I’m saying just to get an understanding of what you are buying. If you have to spend more than 30 minutes I would humbly suggest that it is not the right investment for you. There are many gray areas in life, but when it comes to the most important investment decisions, I like clarity and transparency. If you have a 401(k) plan with self-directed investing, you must know what you are investing in without a trace of confusion. A few minutes of research and/or explanation from a trusted source or advisor should yield a basic understanding. More than that? You’d best consider walking away.
For small business owners who have a 401(k) plan with self-directed investing, I’ll bet you already adhere to the 30-minute rule without even realizing it. We see it with our clients at Employee Fiduciary all the time: they simply don’t have the time to endlessly mull over complicated investment opportunities or watch 90-minute infomercials touting impossibly large, fast returns. Our clients are interested in growing steadily with the market by making wise (read “boring”) investments that will result in a comfortable retirement at the end of their careers.
Don’t misunderstand: self-directed investing in 401(k)s is a good thing, one that the Frugster encourages among those small business owners who have done their homework and know what they want.
