Created by Erica Abbott USU Family Finance Student and Dr. Jean M. Lown

Created by Erica Abbott
USU Family Finance Student
and
Dr. Jean M. Lown
Last October’s FPW program is
available at www.usu.edu/fpw under
past presentations
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Handout: PF Action Plan
• For your use
• Commit to take action
• Share your plans with family & friends
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Why do investors earn less than
market returns?
• Studies confirm actual investors earn below
market returns. Why?
• DALBAR: “average investor earns less - in
many cases, much less - than mutual fund
performance reports would suggest.”
• Past 15 years: investors in US stock funds
earned 2.3% less than the funds themselves
(Morningstar report)
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What investors do wrong & why
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•
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React emotionally to $ news
Buy when news is good & prices high
Sell when news is bad & prices low
Jeff Salisbury’s tuna fish analogy
– Load up the pantry when canned tuna is on sale
– Buy little or none when price is high
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7 Deadly Sins of Investing (Kip. Nov. p. 30)
1.
2.
3.
4.
5.
6.
7.
Following the herd
Giving in to fear
Hanging on too long
Neglecting to rebalance
Making things complicated
Paying too much in fees
Failing to stick to the plan
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1. Following the herd
• When an asset class soars… investors pile in
– After the price has risen
– Buy high (& sell low)
– “Past performance is no guarantee of future
returns.”
• What to do: “Follow rules, not herds”
– Don’t be swayed by CNN, Jim Cramer, etc.
– Dollar Cost Average each month on autopilot
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2. Giving in to fear
• 2008-09 financial market meltdown-->
avoiding stocks
• Volatility is scary but losses are only on paper
until you sell
• Federally insured accounts don’t keep up with
inflation & taxes
• Need stocks for long term goals
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Solution: Focus on Long Run
• Since 1926 US stocks (S&P 500) averaged
10%/year (before taxes & inflation)
– Lots of volatility along the way but upward trend
• Worst case- Invested @ peak: March 2000
– 2 horrendous bear markets
– Positive 3.4% annual return
• Stock market is place for long term $
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3. Hanging on too long
We become psychologically invested in what
we own…
Own a winner? Can‘t part with it
Own a loser? To sell would reinforce the pain
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Redemption
• Have a sell strategy
• Review investments yearly
• For stocks/funds you own- would you
buy it today?
– No? sell part or all
– Adopt a target price to sell
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4. Neglecting to Rebalance
Manage risk by diversification &
Asset allocation
Establish a % share for each asset
category based on risk tolerance
& time horizon
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Redemption
• It may be counterintuitive but..
• Rebalance each year by
– Sell some winners and buy some from loser
category, or
– Buy only in the loser category
• Forces you to Buy Low & Sell High!
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5. Making things complicated
• Too many different investments
• Resembles an index fund but…
– At much higher cost
• Redemption: buy index mutual funds or
Target retirement date funds
– Kiplinger 25 (list of “best” funds)
– Money 70 (list of “best” funds)
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6. Paying too much in fees
• One thing you can
control: expenses
$10,000 & invest
$500/month @ 8%/yr.
For 30 years
Index fund 0.20%:
$818,639
Active fund 1.2%:
$662,916
Difference: ~$156,000
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Redemption
• Compare expense ratios of mutual funds
– FINRA fund analyzer
http://apps.finra.org/fundanalyzer/1/fa.aspx
• Consider the buy/sell costs of stock trades
– Full service broker: $75/trade
– Discount broker: $10/trade
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7. Failing to Stick to Your Plan
• Greatest sin: failing to formulate & follow a
plan
– No plan- how will you know if you are on track?
– Specify your goal (SMART) & time line
– Having a plan helps you resist the other “sins”
• What are YOUR goals? Time horizon? Plan?
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Behavioral Principles http://www.ideas42.org/category/theory
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Limited Attention
• Can’t text, listen to music & drive… humans
are not good at multi-tasking!
• When attention is stretched, people have
difficulty focusing on benefits &
consequences of options.
– Default options (instead of too many choices)
– Automatic saving/investing
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Status Quo Bias
• Comfortable & familiar
• Change the default through…
– Retirement auto enrollment
• Few opt out
– Target retirement funds
• Diversified, choose year of planned retirement
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Mental Accounting
• Assigning $ to different buckets: rent/mortgage,
car payment, etc.
• Plus- prevents spending the rent on dinner out
• Minus- using credit increases spending up to 18%
over cash. Such outcomes are difficult to avoid as
most credit decisions are ambiguous
• Linking saved money to a particular goal –i.e.,
college –makes us reluctant to spend the $ for
other things
• Take away: 529 UESP College Savings accounts
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Social Norms
• “If everyone else jumped off a bridge…”
• Teens aren’t only ones who care about what everyone
else is doing. Knowing what others do provides a
reference point against which people can compare
options when they are unsure about what to do.
• We misperceive social norms, esp. when some choices
are highly visible & others aren’t
• a clearer picture of what constitutes “normal” behavior
for peers, friends, neighbors, or citizens can make us
more inclined to do same.
• Take away: save 15% of income
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Planning Fallacy
• We underestimate amount of effort & time
to complete a task.
• makes it hard to do things like signing up for
retirement savings
• Take away: Commit to action & tell
friend/spouse/partner/coworker to
– Hold your feet to the fire
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Prescriptive & Descriptive Fallacy
• We know what we should do…
• Wash hands, offer pregnant women seat, but…
• Instead of telling people what they should do,
simply inform people of descriptive norms—
what the majority of people actually do.
• R: knowing what other people do is a stronger
influence on how they eventually behave than
knowing what society says they should do
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Procrastination
• When’s the most popular day of the week to
start a diet? Start/increase saving/investing?
• Tomorrow.
• The more steps involved, the more likely
someone is to procrastinate.
• Too many choices procrastination
• Take away: acknowledge & commit
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Self-Control Problems
• At some point even the most disciplined person
will succumb to temptation.
– We have good intentions, but poor follow-through.
• Especially true where future gain (more financial
security) comes at cost of up-front loss (saving
instead of spending)
• Take away: retirement withdrawal penalties
• CD/I-bond withdrawal penalties
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Choice Overload
• Too many choices can be overwhelming.
– People make poor choices or fail to choose
– Jam research study
• Get help in choosing!
– Enlist the help of knowledgeable person
• Retirement accounts- more choices is NOT better
• Focus on the basics
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Availability & Representativeness
• Present choices in a way that highlights the
important context
• Indicating life expectancy of a population can
help people make better decisions about
whether they should claim Social Security
benefits at age 62 or 67 & prevent people from
miscalculating probability that they would not
benefit from waiting.
• Take away: You are unique. Estimate your life
expectancy w/ online calculators
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Problem: Saving requires attention &
self-control
• When $ is tight, mental resources needed to
save are stretched thin, too.
– Behavioral interventions such as automatic
transfers to savings or reminders about savings
goals
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Emotions Get in the Way
• Fear & Greed/exuberance
• Fear -> excessive risk aversion
• 2008-09 huge outflows from stocks
– Market bottomed in March 09 & quickly shot up
– Investors who sold locked in their losses & sat on
sidelines while the markets rallied
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• Awareness: Realize that you want to change or improve something
• Your Ability to change:
• Is this something you can actually control?
• Do you need someone else to change with you? i.e. a spouse?
• Ambition: Consider your desire to change
• Is it strong? Are you on the fence about it?
• Attitude: Positive? Negative? Back and forth?
• “Nothing can stop the man with the right mental attitude from
achieving his goal…” – Thomas Jefferson
• Action: Start implementing the actions that you would need to
change certain behaviors
Small Steps to Health & Wealth
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• Write your goals down where you will see them
• “Goals that are not written down are just
wishes.” -Author Unknown
• Websites send you reminders about your goals
• Stickk.com
• Mint.com: Sends cell phone reminders when
you go over budget. Plus gives you updates
on your goals!
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• Focusing on too many things is
overwhelming
• Paying off debt, savings, retirement,
down payment on a home, etc. Which
should come first?
• It might be better to focus on one primary
goal at a time
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• Helps remind you of your goals
• Seeing progress is motivating
• Gets your family involved
• Positive peer pressure
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• Use a phone app
–Mint.com
• Use a savings
thermometer
• Tickers from websites
–Tickerfactory.com
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• McDonald’s allowed credit card purchasesincreased average purchase from $4.50 to $7
• Journal of Experimental Psychology: “Cash
discourages spending, and credit or gift cards
encourage it…”
• Credit card users spend 12-18% more when
using credit instead of cash (Dun & Bradstreet)
– Spending increases even more when credit card
offers rewards or cash back
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• “…losing something makes you twice as
miserable as gaining the same thing makes
you happy.” Nudge by Thaler & Sunstein
• Paying with cash induces a feeling of loss,
whereas swiping plastic, only to put it back in
your wallet, does not
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• Set up automatic deposits to savings,
investments, & bill payments
• Once it’s done, you don’t have to think about
it anymore!
• Biggest step is making
the time to set it up
– “Execution”
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Autopilot: Dollar Cost Averaging
• Automatically invest same amount every pay
period
– Regardless of market gyrations
– Removes the emotion & temptation to subvert
your plan
– Eliminates the need for willpower
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• Pre-commit to a decision
- Consumers are more impatient in the nearterm than in the long term
- Seek instant gratification
- Feed the pig next month
- But sign up today!
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• We’ll commit to saving $100 five weeks from now,
but we won’t commit to saving $100 this week.
• How to create a good habit:
– Sign up to increase (or start) your 401(k)
contributions (emergency savings, power
payments, student loans, & credit card
payments) starting in a few weeks or months
You’re less likely to undo that
decision & more likely to start a
good habit
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“Unless
commitment is
made, there are
only promises
and hopes…but
no plans.”
-Peter Drucker
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Put your mind to it
“One of the most powerful
motivational strategies to…
increase wealth is visualization.
People can alter their lives just by
altering their mindset.
Visualization (a.k.a., mental
imagery) is a powerful step in the
process of setting and achieving
goals.” SSHW
What is your vision for your goal?
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Commit to Making a Change (SSHW)
• 5 stages of change (Transtheoretical Model)
1. Precontemplation- unaware
2. Contemplation- recognize need to change
3. Preparation- Commit to make changes
4. Action- take the plunge & make changes
5. Maintenance- sustain change & reap benefits
• Studies show that “plans to change” can
predict actual change.
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• Telling others about your goals & plans helps
you stick to them
• Regular reminders from family & friends
increases likelihood of success
– Self-inflict peer pressure to improve your
financial situation!
– Failure to follow through will
result in your anti-charity receiving
a donation from you!
– Sign your contract today!!
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www.StickK.com
• If you don’t do ‘X’ you’ll have to pay ‘Y’ to
an ANTI-charity of your choice
• Recruit a trusted friend as your referee
• Use for goals such as paying off debt,
starting retirement, sticking to your budget,
weight loss, smoking cessation, etc.
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Resources
• Kiplinger Nov. “How to be a better investor”
• Small Steps to Health & Wealth
http://njaes.rutgers.edu/sshw/
– Overcoming Obstacles and Taking Action
– Behavior Change Strategies
– Set a Date and Get Started---Just Do It
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Upcoming FPW
• November 13: Estate Planning
– Quit procrastinating!
– What you need to do & resources to accomplish
• No December program
• 2014 topics
– Utah’s health policy project- navigating insurance
– Financial planner Lon Jeffries
– Invest in your house: Upgrades that make sense
– Social Security
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Sign up to follow the FPW Blog
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http://www.fpwusu.blogspot.com/
Searchable
Latest info & advice
Answers to your financial questions
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Curious Behaviors…
• That can ruin your retirement
• http://crr.bc.edu/special-projects/interactivetools/curious-behaviors-that-can-ruin-yourretirement/
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