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Why Do We Have Trouble with Financial Decisions?

The U.S. is in a retirement crisis and our behavior is a key driver. Why do we tend to make poor choices? Academic research is beginning to help us better understand why.

People are financially illiterate since they lack understanding of
simple economic concepts and cannot carry out computations such as computing compound interest, which could cause them to make suboptimal financial decisions.
Impatience or present-bias might explain suboptimal financial decisions. That is, some people persistently choose immediate gratification instead of taking advantage of larger long-term payoffs

This is according to a study published by Dr. Justine Hastings, Dr. Olivia Mitchell, and the Michigan Retirement Research Center at the University of Michigan:
How Financial Literacy and Impatience Shape Retirement Wealth and Investment Behaviors (download here).

University of Michigan Retirement Center

When Your Advisor Can’t Be Trusted

Why is it so difficult to expect that people selling us investment products will put our interests first?
Is the person who gives you advice on your portfolio and retirement account a “registered investment adviser” or a “broker-dealer”?
Ask those giving you investment advice, sales pitches or specific retirement-plan suggestions if they are acting under a fiduciary standard of care.
Insist that advisers offering specific investments inform you of any conflicts of interest related to their recommendations and disclose any commissions, referral fees or other compensation they would receive from selling you a financial product.
Don’t be afraid to be impolite—always ask what an investment will cost, both in commissions and in built-in expenses such as fund expenses.

Read Karen Blumenthal’s article from the Wall Street Journal and be an informed investor:

Getting Going: Should You Trust Your Financial Adviser? - WSJ.com

Getting Going: Should You Trust Your Financial Adviser? http://online.wsj.comRegistered investment advisor or broker-dealer? The distinction is lost on most investors even though the two operate under very different standards.

Weekly Market Review ~ Friday, March 11, 2011

On Monday, a downgrade of Intel coupled with continued concern over rising oil prices sent stocks down nearly a percent. The Dow experienced yet another 100+ point day, this time in the positive direction on Tuesday after Bank of America announced it hopes to increase dividends and buy back shares of its stock. Wednesday marked the two year anniversary of the low point in the recent bear market, with the major indexes changing very little. The S&P 500 has nearly doubled from its March 2009 low. On Thursday, the Dow dipped below 12,000 as it shed nearly 2% on continued Middle East/North Africa fears. The magnitude 8.9 earthquake in Japan on Friday was not perceived to be a threat to the recovering world economy, as stocks made moderate gains.

Increased volatility marked this week’s trading, with all the major indexes taking a hit.

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New York Stock Exchange

E*Trade Settles with North Carolina Investors

North Carolina is the first state to reach a settlement with E*Trade over the misrepresentation of auction-rate securities as safe investments suitable for short-term cash management purposes.

The NC investigation found that E*Trade salesmen had not been properly trained by the company to sell the products and had failed to consistently disclose the risk that, if the auctions failed, clients would not be able to sell their auction rate securities and could be stuck with illiquid investments.

E*Trade to pay $25,000 settlement - CharlotteObserver.com

E*Trade to pay $25,000 settlement http://www.charlotteobserver.comE*Trade Securities will pay a $25,000 civil penalty under a settlement reached with the state over auction rate securities it sold to North Carolina investors.

Dumb Money and How to Avoid It

Wall Street uses the derogatory term “dumb money” in reference to individual investors who repeatedly buy stocks at a high price and sell stocks at a low price.

Adopt a disciplined investment strategy to avoid participating in the dumb money.

When Your Money is the Dumb Money – NYTimes.comhttp://bucks.blogs.nytimes.comBy now you have probably heard about the growing evidence that “dumb money” is entering the market. The dumb money is not my term, by the way; it’s how Wall Street refers to individual investors who repeatedly sell stocks at a low price, only to turn around later and buy them for high…

NorthStar Hits All-Time High Following Strong February

The NorthStar Equity portfolio closed at an all-time high of +53% total return as of February month-end. The S&P 500 with dividends gained a total of only +14.5% during the same time period (Jul 2006-Feb 2011). Notably, the monthly percent return of +9.8% makes February 2011 the second strongest month in NorthStar’s history.

NorthStar vs. S&P 500

Visit the NCA Performance Page for additional information and disclosures regarding performance. Past performance may not be indicative of future results.

Oppenheimer vs Vanguard

Target-date mutual funds run by Vanguard charge an average of 0.18% of invested assets per year. Oppenheimer charge 1.68% of invested assets per year. Oppenheimer investors pay 9.3 times more than Vanguard investors for the same product.

Fees for Target-Date Funds Could Delay Your Retirement by YEARS

Target-date funds are commonly offered as one-stop investing solutions in 401(k) plans. But be careful of FEES — some funds charge more than 9 times what others charge for the same sevice. Those high fees could delay your retirement by years!

401(k) Generation Begins to Retire

The 401(k) generation is starting to retire and it’s not pretty. The median household lead by a 60 year-old with a 401(k) has LESS THAN ONE-QUARTER of what its need to maintain its standard of living in retirement!

Boomers Find 401(k) Plans Come Up Short - WSJ.com

Boomers Find 401(k) Plans Come Up Shorthttp://online.wsj.comThe median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston…

Charlie Sheen and Your Portfolio

“You would think the total lack of a moral compass — standing alone — would cause you to flee from their offices…”

Investing Charlie Sheen Stylehttp://www.huffingtonpost.comDon’t be too quick to criticize Mr. Sheen’s appalling judgment. Most of you are not doing any better when you pick an investment adviser.

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