The Standard & Poor’s 500 index has soared 27 percent since October! These times of strong market gains are the brass ring for a large swath of well-educated, well-off Americans.
But recent academic research on three topics – value investing, the record of individual investors, and the usefulness of investment advisers – raises serious questions about buying individual stocks or actively invested stock funds.
The upshot of this research, it seems, was neatly summed up by Nobel Prize-winning economist Daniel Kahneman’s bestseller, “Thinking, Fast and Slow:” stock picking “is more like rolling the dice than like playing poker.”
The papers are complex (though not difficult to read), so here are synopses and links to them: …Learn More
We know that not enough Americans save for retirement. Behavioral finance professor Shlomo Benartzi devised a way to fix it – quite awhile ago, in fact.
To ease the pain of saving money, Benartzi and economist Richard Thaler designed a now-famous program in which employees can commit to increase their 401(k)s savings when they get a raise.
Saving is painful because it requires sacrifice, but committing to save money that one doesn’t yet have synchs with human psychology. In 1998, Benartzi and Thaler tested their theory on blue-collar workers in a Midwestern manufacturing plant, and it worked.
The key to saving, Benartzi said, is “embarrassingly simple but extremely powerful.”
The finding was nothing short of ginormous, though employer adoption has been modest. David Wray, president of the Plan Sponsor Council of America, estimated that about 10 percent of U.S. employees with 401(k) plans at work have automatic savings increases, typically at raise time. It’s much more common among mega-employers, he said.
If you’ve heard about behavioral economics but haven’t had time to learn what it’s really about, this 15-minute TED video in which Benartzi explains is an excellent start.
Odds, outliers, random – such terms are batted around like gnats among the economists and statisticians here at the Boston College research center that sponsors this blog. Recently, we tossed around some parallels between the art of NCAA Basketball Bracketology and picking stocks or actively managed mutual funds.
Here’s our Final Four:
A fresh printout of an unscrawled bracket is like a new pool of money to invest – it engenders the hope of winning big. The thrill can give way to defeat — very suddenly.
Admit it: Most people fill in their bracket winners without doing any research on the teams they’re selecting. (And who reads a prospectus?)
A team (or stock) on a winning streak is a prime candidate for losing – and it takes only one in the single-elimination championship.
Past performance is not a reliable predictor of playoff results. Remember the 2011 NCAA basketball champion? UConn lost last week. And I won’t even mention the Duke Blue Devils.
Send in your own ideas to Squared Away! To do so, click “Learn More.”Learn More
Tried-and-true financial frauds – Ponzi schemes, high-yield investments, and “pump and dump” stock scams – have victimized unsuspecting targets for decades, even centuries.
These well-known frauds are effective, because con men change their disguises so they won’t be recognized. Six common disguises are detailed in a report I wrote for the Financial Security Project at Boston College’s Center for Retirement Research, which hosts this blog.
In this video, a senior fellow at the Brookings Institution talks about his latest book and offers a clear-sighted explanation for complex macro-economic forces that shape all Americans’ saving habits and financial security.
Starting in the early 1980s, stock markets boomed and housing prices increased year after year, and Americans “thought they were getting rich,” explains economist Barry Bosworth. “So they thought, ‘Let’s spend a little bit of it.’ “
Billions of dollars of wealth vanished in the 2008 financial market collapse, marking what may be the end of a golden era of wealth formation and undermining plans laid by workers and retirees, he said. Bosworth’s book was released last month: “A Decline in Saving: A Threat to America’s Prosperity.”
Full disclosure: The book incorporates research funded by the U.S. Social Security Administration (SSA) through the Retirement Research Consortium, which also funds this blog. The opinions and conclusions expressed are solely those of the blog’s author and do not represent the opinions or policy of SSA or any agency of the federal government.
A breakthrough experiment determined that some low-income tax filers are willing to save part of their IRS refund after all.
What separates savers from non-savers is each individual’s own “mental accounting.” What specifically influences them is whether their refunds exceeded their anticipation.
The research found that 7 percent of all low-income filers saved part of their refunds. But 12 percent of people who got more than they’d anticipated agreed to save – they did so by opening a savings account or buying a US savings bond or certificate of deposit. Only 4.5 percent of those who got the same as, or less than, anticipated, saved part of it.
“At tax sites, most people don’t save,” said Michael Collins, director of the Center for Financial Security at the University of Wisconsin, Madison. “But if you target the right people you might find some savers.” His research controlled for income, demographics and the refund amount. …Learn More
In the second of two videos, retirees from the Savin Hill Apartments in Boston’s Dorchester neighborhood spoke honestly about the decisions they made during their working lives that have affected their financial security in retirement. The residents come from all walks of life and from home towns ranging from Dabrowa Tarnowska, Poland, and Thomasville, Alabama, to around the corner in East Boston.