Investors’ #1 Problem: Not Saving Enough

April 12, 2013

The Wall Street Journal had a small piece on Americans’ retirement readiness.  In general, they’re not saving enough.  Here’s an excerpt:

A separate study released today by investment firm Edward Jones finds that 79% of 1,008 U.S. adults surveyed in February said that they have committed a money mistake – and of those, 26% reported not having saved enough for retirement as their No. 1 problem. Also on the list: not paying attention to spending and making bad investments.

The EBRI research found that Americans are coming to grips with the dramatic improvements they need to make in their saving habits, with 20% of workers saying they need to save between 20 and 29% of their income to achieve a financially secure retirement, and 23% saying they need to save 30% – or more.

I added the bold.  If you are a financial advisor, it’s really worth reading the entire EBRI research brief.  It is absolutely eye-opening.  You will discover that only 23% of workers ever obtained investment advice in the first place.

And, when they got advice, they ignored a lot of it!  Here’s the graphic from EBRI on follow-through:

Only 27% fully implemented the advice.  That makes about 6% of investors that got advice and followed it!  (Elsewhere in the report, you will discover that a minority of investors have even tried to figure out what they might need in the way of retirement savings.)  It seems obvious that you would have a large chance of falling short if you didn’t even have a goal.

As advisors, we often forget—as frustrated as we sometimes are with clients—that we are dealing with the cream of the crop.  We work with investors who 1) have sought out professional advice and 2) follow all or most of it.  We get cranky at anything less than 100% implementation, but many investors are doing less than that—if they bother to get advice at all.

So lighten up.  Keep nudging your clients to save more, because you know it is their #1 problem.  They might think you obnoxious, but they will thank you later.  Help them construct a reasonable portfolio.  And encourage them to get their friends and colleagues into some kind of planning and investment process.  Their odds of success will be better if they get some help.

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CNBC: Public Enemy #1?

November 1, 2012

A recent article at AdvisorOne suggests that CNBC is detrimental to the well-being of your clients.  In truth, it didn’t really single out CNBC.  It was applicable to any steady diet of financial news.  Here’s what the article had to say about financial news and client stress:

Clients get stressed by things you wouldn’t predict. This is a classic example, uncovered at the Kansas State University (KSU) Financial Planning Research Center by Dr. Sonya Britt of KSU and Dr. John Grable, now at the University of Georgia, in their recent paper “Financial News and Client Stress.” They found that contrary to what you might think, client stress goes up when watching financial news, and hearing that the market went up causes stress levels to rise even higher. “Specifically, 67% of people watching four minutes of CNBC, Bloomberg, Fox Business News and CNN showed increased stress, while 75% of those who watched a positive-only news video exhibited an increase in stress,” they wrote.

Why? “Financial news was found to increase stress levels, particularly among men,” wrote Grable and Britt. Surprisingly, positive financial news, like reports of bullishness in the stock market, created the highest levels of stress, they found, suggesting that positive financial news may trigger regret among some people. The authors referred to previous studies of regret that found “people tend to feel most remorseful when they look back at a situation and realize that they failed to take action.” The authors’ conclusion: Financial advisors should think twice about having office TVs tuned to financial channels.

Surprising, isn’t it, to find out that clients were stressed even when the market was going up?  The ups and downs of the market appear to elicit client’s concerns about their financial decisions.  Anything that undermines their confidence is probably not a positive.  In fact, one of the important things advisors can do is help clients manage their investment behavior.  Financial news appears to work at cross-purposes to that.  (Other things do too; the full article has a host of useful thoughts on what stresses clients and how to reduce client stress.)

The relationship between high levels of stress and poor decision-making is well-known to psychologists, researchers and sports fans around the world. “Our brains operate on different levels, depending on circumstances,” Britt told me in an interview. “Under high levels of stress, our intellectual decision-making functions shut down, and our emotional flight or fight response kicks in.” Added Grable: “People will adapt to low levels of stress differently, but overwhelming stress results in predictable behavior. When we are stressed, our brains cannot move to make intellectual decisions.”

If we want to help our clients stay calm and stick with their plan, maybe we should ask about their family, their pets, and their hobbies in a relaxed setting rather than inundating them with market data.

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The Real Effects of Debt

September 19, 2012

From the Bank of International Settlements, research that confirms what Ken Rogoff has been telling us all along.  Here’s the abstract:

At moderate levels, debt improves welfare and enhances growth. But high levels can be damaging. When does debt go from good to bad? We address this question using a new dataset that includes the level of government, non-financial corporate and household debt in 18 OECD countries from 1980 to 2010. Our results support the view that, beyond a certain level, debt is a drag on growth. For government debt, the threshold is around 85% of GDP. The immediate implication is that countries with high debt must act quickly and decisively to address their fiscal problems. The longer-term lesson is that, to build the fiscal buffer required to address extraordinary events, governments should keep debt well below the estimated thresholds. Our examination of other types of debt yields similar conclusions. When corporate debt goes beyond 90% of GDP, it becomes a drag on growth. And for household debt, we report a threshold around 85% of GDP, although the impact is very imprecisely estimated.

You can read the whole paper here.

Households really aren’t any different.  High levels of debt can impact their solvency also, and  threats should be addressed quickly and decisively.  Likewise, it’s a good idea to have a fiscal buffer for emergencies.

I’m not sure how quickly and decisively Congress is dealing with national fiscal issues, but you have control of your own response at the household level.

It’s pretty clear that there will be significant investment implications from high levels of debt, whether at the sovereign or corporate level.  It’s not clear exactly what those implications will be.  In fact, there is still a lot of disagreement about whether taking on more debt in QE3 will help the economy or hurt it.  While we have a chance to see if Mr. Rogoff’s theory works in the real world, investors might do well to heed the message sent by relative strength.  Theory is interesting, but it may be more profitable to see which asset classes get stronger as a result of continued easing.

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