Today's investment education should be less Modern Portfolio Theory and more behavioral economics. (Photo: Shutterstock)
Which question do you think the typical retirement plan participant could answer the quickest: “What is the long-term impact of your asset allocation on the growth of your retirement plan?” or “What is the immediate impact to your weekly spending if you contribute $10 more a paycheck into your 401(k)?”
Therein lies the reason we no longer see hours of employee education dedicated to style boxes, growth versus value definitions, and other remnants of Modern Portfolio Theory. The truth of the matter is people just don't need to know that stuff.
Christopher Carosa, CTFA, is chief contributing editor for FiduciaryNews.com, a leading provider of essential news and information, blunt commentary and practical examples for ERISA/401(k) fiduciaries, individual trustees and professional fiduciaries.
Gone are the days when everyone watched CNBC in anticipation of sneaking off to some hidden cubicle to place a few day trades. Remember those days? Everyone amped to discover the latest sure-thing “home run” stock. In fact, today, according to a December 2018 Business Wire release, “CNBC recorded its second-lowest rated year in the past 25 years.” Face it, believers, high finance simply doesn't generate the highs it once did.
And that's a good thing. People have much greater dreams than to understand and contemplate the intricacies of the capital markets. To the extent anything regarding their company's retirement plan impacts their daily lives, their interest will be greater (and their eyes less tired) if the subject turns to topics which they can actually control in an immediate way.
Yes, they control which investments they select, but the results of that “control” aren't instantly felt. They have a similar control over their savings rate, and the impact of that decision is something they can see right away.
Does this sound counterintuitive? You'd think that quick impact would frighten them away. It doesn't.
Feeling the results of your decision, rather than scaring you away, actually leads to greater satisfaction in that decision. It's a form of a “self-justification” response. Contrast this with your thoughts when you don't know the outcome of a decision for a long time. You grow anxious. You begin to question the validity of your choice. You draw closer to reversing what may have originally been a sound decision made dispassionately.
As your emotions peak, they tempt you to select a less appropriate path. No one wants to go down that path; hence, the popularity of target date funds and other QDIAs. Why make a decision when you don't have to?
Allow me to amend that last statement: Why make an investment decision when you don't have to?
This doesn't mean we should forsake investment education for employees. We don't need to reject reiterations of fancy formulas attempting to explain the machinations of the Capital Asset Pricing Model and those ubiquitous asset allocation pie charts. Rather, we must focus on the traps investors allow themselves to fall prey to.
This requires investment education be less Modern Portfolio Theory and more behavioral economics. It's not about offense and finding home runs. It's about defense and hitting singles.
It's far easier to stay ahead when you don't have to worry about catching up after falling behind.
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Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
