MUCH OF THE MEDIA commentary about investing positions the individual as a heroic figure. We are, it seems, all supposed to deploy our expertise in a battle to beat the market, with bragging rights going to the winners.
Problem is, this framing is based on three myths.
Myth No. 1: Your job is to outwit the financial markets.
Underlying this is the notion that the key to investment success is to have rare insights and expertise not shared by anyone else,
SOCIAL SECURITY is the most important source of income for many retirees. Yet there’s also a lot of confusion, especially when it comes to how benefits are reduced if you continue working and how benefits are taxed. In fact, I’ve heard many folks confuse and conflate these two separate issues.
Want a refresher? Here’s a look at both topics:
Working while collecting. If you start Social Security benefits before you reach your full retirement age (FRA),
HOW MUCH WOULD you pay for $10? Taking my cues from a game developed by economist Martin Shubik, I’d offer to auction off a $10 bill to my high school students. There were three rules:
Students could only offer bids. No commentary, cooperation or deal-making were allowed.
The highest bidder paid me the money and received the $10.
The second-highest bidder had to pay me their final bid but got nothing.
I ran such auctions for 20 years and it almost always had three stages.
WHY DO I AVOID individual stocks today? I’ve previously written about the big loss on a broker-recommended stock that led me to manage my own investments.
That loss, however, didn’t deter me. In my early days as a do-it-yourself investor, I mainly bought mutual funds, albeit too many of the high-fee actively managed variety. But I still had an interest in picking individual stocks.
In fact, it was part of my investing heritage. My father had always invested in individual stocks.
AS MY WIFE AND I approached our June 2014 retirement, I set out to consolidate and simplify our investments.
The first account I dealt with was my 403(b). Fidelity Investments was handling the 403(b) plan for the University of North Carolina System, which is where I worked. But while Fidelity was the administrator, the plan included several Vanguard Group funds, to which I’d been contributing. This was where I had the majority of my retirement money.
I’D LIKE TO DESCRIBE—and recommend to you—what I’ll call the John Cleese approach to financial planning. It is, in my view, the simplest and most effective way to think about saving for retirement or any other goal.
John Cleese, the English actor and comedian, is largely retired. But in an interview, he described his approach to getting work done. When he had a weekly TV show, Cleese said, he didn’t worry about being unproductive some days.
WHY DO WE MAKE spending decisions that we later regret? Yes, we tend to live for today and give scant thought to tomorrow. But it’s more complicated than that—which brings me to four insights from psychology.
I find the insights below fascinating, in part because they describe how I behave with uncanny accuracy. Many readers, I suspect, will also catch a glimpse of their own behavior:
Moral licensing. If we do something good—exercise,
THE FLU SEASON was approaching, so I decided to schedule an appointment with my medical provider for a flu shot. The next morning, I received an email from my prescription drug plan informing me that it was processing a payment for $30.80.
My immediate thought: “How could my medical provider charge me for a flu shot that I haven’t yet received? And why aren’t they billing Medicare?” Medicare provides a free flu shot to every enrollee.
WELL, IT SOUNDED good. Academic theory and nearly a century of investment experience supported the argument that small-cap value is the most promising market segment over the long term, since it offers the superior risk-adjusted return that comes with owning both neglected small-cap shares and shunned value stocks.
But as legendary economist John Maynard Keynes observed, in the long run, we are all dead. In my 36-year investment career, both small- and large-cap value have lagged large-cap growth.
RESEARCHERS HAVE spent decades probing the connection between money and happiness. For instance, a much-cited 2010 study by academics Daniel Kahneman and Angus Deaton found that folks tend to feel happier the more money they make—but only up to a point, which they estimated to be about $75,000 a year.
But using only income to measure the link between money and happiness is incomplete. Another study, entitled “How Your Bank Balance Buys Happiness,” analyzed the connection to people’s “cash on hand.” The researchers found that having more money in checking and savings accounts was associated with higher levels of life satisfaction.
ONE OF MY SONS has to choose health insurance for the year ahead—and his employer provided a 95-page pamphlet. Let’s face it: If you need that amount of information to make a choice, something is wrong.
The pamphlet describes three medical options, plus dental options and vision coverage. Two options get you an employer health savings account contribution—or it is a health reimbursement account? There are three levels of deductibles and coinsurance and, of course,
THE ELECTION MAY be hogging the headlines, but it seems folks still have a healthy appetite for thoughtful financial articles. Here are the seven blog posts from last month that garnered the largest number of HumbleDollar readers:
The last major rewrite of the tax code was just three years ago—but the next one may be right around the corner. James McGlynn looks at the potential changes that are in the offing.
Planning to relocate when you retire?
AT 82 YEARS OLD, investment manager Jeremy Grantham has seen his fair share of market cycles. And as a U.K. native living in the U.S., he has the interesting perspective of an outsider. In a recent interview, Grantham shared his unvarnished view of the U.S. market. “American capitalism has become fat and happy,” he said. The U.S. stock market is in a bubble that will likely burst within “weeks or months.”
I don’t believe anything should be judged over the span of a single week.
IT’S HALLOWEEN, but not much frightens me—at least financially. My portfolio is broadly diversified, I have the insurance I need, and I have enough set aside for retirement. The highly improbable could happen, but I’m not going to lose sleep over that.
Still, even for those of us in decent financial shape, I see two key reasons for concern. We have no control over either—which is why they might seem scary—but we can take steps to limit the potential fallout.
YOU’RE SITTING in your favorite restaurant, feeling famished. The waiter arrives and reads a long list of mouth-watering specials. Yet the moment he walks away, all you can recall is the last item on the list.
Welcome to the recency effect.
In psychology, the recency effect refers to the human tendency, when asked to remember a long list of things, to have sharper recall of the final items. No doubt you’ve experienced this at a party.