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Jewish World Review
April 22, 2005
/ 13 Nisan, 5765
Americans are amazingly dumb about investing and should not be encouraged risk their futures
By
Froma Harrop
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http://www.JewishWorldReview.com |
Are Americans smart enough to manage their own retirement
savings? No, as a matter of fact, they're not. Americans are amazingly dumb
about investing.
Take my friend John. An auto mechanic, John was an absolute
genius under the hood of an Alfa Romeo. But he was vain. A crook called
offering to get him into commodity options, and John thought he had entered
the gates of high finance. He forked over 10,000 of his hard-earned dollars.
Of course, they disappeared.
Now, if John had caught someone stealing the $30 radio in his
car, he would have ripped him to pieces. But he accepted his $10,000 loss
like a sweet little lamb.
"Aren't you angry?" I asked him. No, John replied. He understood
that the investment was risky. Had it gone well, he could have become very
rich. John had been rolled and didn't even know it.
That was an out-and-out con, and an extreme case. But every
week, fresh evidence bubbles up that Americans don't get the basics of
ordinary investing.
Rule number one is to diversify. This means spreading money
around different investments.
That's exactly what many Enron workers did not do. Rather than
invest in a good mix of securities, they put most of their 401(k) money into
Enron stock. The stock lost 99 percent of its value in one year, devastating
their retirement accounts.
You'd think the Enron fiasco would be a lesson for us all. But
just three years later, the same thing happened at Marsh & McLennan, the
financial-services company. Thousands of workers had filled their 401(k)
retirement accounts with Marsh & McLennan stock. A scandal sent the shares
into a tailspin. What makes this tale extra sobering is that the Marsh &
McLennan employees worked in finance. They were more sophisticated about
investing than the average Joe and Jane.
People still haven't learned. A Hewitt Associates survey of 500
companies looked at workers who keep their employer's stock in their
401(k)s. It found that an average 41 percent of those accounts were invested
in that one stock.
Richard Thaler has made a career of cataloguing the blunders of
amateur investors. A University of Chicago economist, Thaler ticks off the
mistakes: People tend to be overconfident in their ability to pick stocks.
They are unwilling to admit a mistake and make matters worse by holding on
to losers. They put more money in the market as it nears its peak. When a
market is rising, they think it always will.
The federal government has been a model for giving workers
control over their retirement accounts. Too bad federal employees haven't
been model investors.
After stocks soared in the '90s, many federal workers did
exactly what Thaler predicted they would do. They took money out of
safe-but-dull Treasury bonds and put them in an S&P 500-stock index fund.
The Wall Street bubble burst and their retirement accounts lost big.
People in every age group make unwise 401(k) investments,
according to the Employee Benefit Research Institute. For example, young
people should be heavily invested in stocks. But half of workers in their
20s have too little or no money in stock funds, the institute reported.
Older workers should keep more of their money in bonds. But many workers in
their 60s had nearly all their 401(k) money in stocks.
Don't get us started on real estate. Economists across America
warn that housing prices are a bubble about to go splat. But the University
of Michigan recently found a growing confidence in the promise of
ever-rising property values. According to its consumer survey, 22 percent of
households think that real estate is now a great investment double the
share of 15 months earlier.
Americans may be dumb about investing. That doesn't mean they
are dumb. They've just never worked at it. I'm smart enough to fly a Boeing
747, but I don't know how.
No one would ever put me behind the controls of a jumbo jet, but
I can buy a stock as easily as Warren Buffett. Adding danger are the
flattering words of brokers and politicians pushing private Social Security
accounts. They tell us we have what it takes. History would disagree.
Every weekday JewishWorldReview.com publishes what many in in the media and Washington consider "must-reading". Sign up for the daily JWR update. It's free. Just click here.
Froma Harrop is a columnist for The Providence Journal. Comment by clicking here.
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© 2005 Creators Syndicate
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