August 2011

A woman laying on the ground, exhausted.

Financial Decisions Wear Us Down

Are Americans suffering from financial-decision fatigue?

After the relative calm of rising financial markets though the 1980s and 1990s, Americans have lived through a series of booms and busts. First came the Internet boom of the late 1990s, which busted. Then the real estate market took off just as “emerging markets” plummeted. That was only a prelude to the worst financial-market collapse since the Great Depression. The stock market is now bouncing around like a bungee jumper.

Roiling markets in recent years have spurred decision after decision – about retirement, home buying, downsizing, mortgage refinancing, spending on large purchases such as a car, and where to find a good job.

Investors are advised to stick with a long-term plan and not react to every market fluctuation. In reality, there’s a history of research showing that dramatic gains and losses do cause people to change their behavior. Many Americans decided to abandon the stock market after the 2008-2009 decline, which pummeled 401(k) balances.

Researchers at Boston College’s Center for Retirement Research (CRR), which hosts this blog, identified a related set of decisions. The Center surveyed people who had lost 10 percent or more of their retirement savings: 57 percent decided to delay retirement, save more money, or both.Learn More

Why Baby Boomers Can’t Retire

A centuries-old trend of retiring at an earlier and earlier age has completely reversed, concluded a July report by the TIAA-CREF Institute.

In 1910, men didn’t retire until they were about 73 but that dropped to age 63 by the mid-1980s, the golden era for generous union- and employer-sponsored pension plans. Then the retirement age and labor force participation ages started heading back up, according to TIAA-CREF’s report, “Early Retirement: The Dawn of a New Era?” Women experienced a similar though less dramatic trend.

The report provided numerous explanations for this, including the demise of the mandatory retirement age for most American workers; the improved health of older Americans; and technology that has created options about when and where they work. Many retirees go from full-time work to part-time “bridge” jobs.

But what about the economic and cultural forces that have left baby boomers, myself included, financially unprepared for retirement? Delay for us isn’t a choice but a financial imperative. …Learn More

Commonly asked questions to Brokers.

How to Grill Your Stockbroker

Stockbrokers and financial advisors typically focus on the mechanics of investing – the dividend, the strategy, or past performance. When they do, investors often become overwhelmed by the conversation.

To break through that and improve their comfort level, investors should instead focus on the more important issue at hand: the credentials and character of the person peddling those investments, said Tamar Frankel, a law professor at Boston University.

“I want to shift the focus from what is being sold to who sells it,” she said.

An expert in financial regulation and fiduciary law, Frankel’s latest research examines the role of trust in various professional relationships, including the relationship between a broker or advisor and his or her client or potential client.

Frankel’s basic premise is that no question is a stupid question. Since brokers and investment advisors are not regulated by the same fiduciary standards that govern, say, employer pension funds, investors must protect themselves.

That can be difficult to do when the broker is throwing around unfamiliar terms. She recommends investors come armed – with questions – to their meetings with brokers. She has put together a deceptively simple list of questions. If the broker refuses to answer a question – his or her right – then the investor has already learned something important.

Here are three of Frankel’s 15 questions and her thinking behind them.

Question: “Are you a registered investment advisor, registered broker dealer, or both?”

Rationale: Frankel’s message here is: assume nothing. Investors should be certain that the investment advisors or brokers being considered meet the professional standards established by their own profession. Even better, check out their credentials beforehand but ask the question anyway. …
Learn More

App Promotes Retirement Saving

The impact of today’s purchasing decisions on how much money you’ll have years from now, in retirement, can be abstract. Putnam Investments’ new iPhone app does the math for you.

This Putnam video uses the example of an HDTV that costs $1,738: save that money instead and earn an additional $44.18 per month in retirement. That’s enough for a dash to the grocery store or an evening at the movies.

Putnam’s senior Web executive, David Nguyen, called it a “smart app,” because it allows users to tailor the assumptions that drive the calculations. For example, the app takes into account the user’s age, and it assumes the money not spent will earn investment income until you’re 65 years old (that targeted retirement age can also be changed). The investment returns mirror the individual returns for each user’s asset allocation.

Phone apps are proliferating, and there are lots of cool new ones for every financial need and age group, including children. Putnam’s app is pretty popular. The Boston mutual fund company said about 1,000 people have downloaded its new PriceCheck&Save application from Apple’s iPhone store since its June 6 release.

Unfortunately, it’s available only to those whose 401(k)s are managed by Putnam, though the company is working on an unrestricted app.

If Putnam doesn’t, someone else surely will.Learn More

‘Finglish’ Is the Problem

All the headlines about “financially illiterate” Americans miss something important. The language financial professionals use can be incomprehensible.

In this humorous video, David Saylor, whose job is basically “word consultant” for Invesco Van Kampen Consulting, walked around downtown Chicago and asked people to define industry terms such as “dollar-cost averaging” and “beta.”

One person got one answer right. (After watching the video, readers may need to consult Saylor’s glossary, below.) Even a seemingly simple concept – “transparent fees” – was misinterpreted. It means that fees are fully disclosed but was interpreted to mean “invisible.”

No wonder people are confused by the “Finglish” – financial English – thrown around by their mutual-fund companies, 401(k) managers, and other investment professionals, Saylor said.

His work also explores the subtle distinctions people make when the industry attempts to use familiar terms, such as “guarantee” or “nest egg.” …

NWNE Heard On The Street from Center for Retirement Research on Vimeo.

Learn More

A man, head in hands, sitting in front of a monitor depicting a stock crash.

How Emotions Drive Investing

With the Standard & Poor’s 500 stock index down 13 percent in three weeks, new research confirms what many people believe to be true: emotions drive investment decisions that can lead to costly mistakes.

In a forthcoming paper in the Journal of Market Research, three business professors were able to show for the first time that an investor’s prior experience with buying and selling a company’s stock – not cold, hard analysis – is what determines whether he or she would repurchase that same stock at a later date. When the entire market plunges hundreds of points, as it has this week, the tendency to be led by one’s emotions is only magnified.

Money-losing stocks are “associated with disappointment and regret,” the researchers wrote. “Simple reinforcement learning deters them from repeating the behavior that previously caused pain.”

Their paper, “Once Burned, Twice Shy,” adds to a growing literature that attempts to clarify the psychology of financial behavior. It’s a twist on one classic study that determined that people feel the pain of financial losses – or “regret” – far more acutely than they feel the joy of gains. Other studies have firmly established that investors more often sell winning stocks than losing stocks. … Learn More

Widowed Advisor Strives to Help Others

The death of a husband is frightening and overwhelming. These feelings are magnified for women who relied on their husbands to handle the household finances.

Widows Guidebook coverFlorida financial planner Kathleen Rehl’s new book, “Moving Forward On Your Own: A Financial Guidebook for Widows,” gently guides widows through this daunting task.

The author’s professional experience over the years has naturally “morphed” into her interest in helping her “widowed sisters,” through this book, she said. And her credentials are all relevant: Ph.D. in education, CFP certification, and recent widow. Her husband died of liver cancer in 2007, eleven weeks after his diagnosis.

Here’s what I like about her award-winning book: my 75-year-old mother would like it. Rehl tries to make widows comfortable that keeping their emotional priorities straight is their top priority – allowing time to grieve, making an effort to plan activities with friends and grandchildren, and growing spiritually.

Advice like this is interspersed with examining the reader’s “personal money style,” a “financial feelings survey” and brass-tacks advice like figuring out what net worth is and where the money goes.Learn More