2015 / Behavior
Even Harvard economists make investing mistakes!
Earlier this week, the New York Times featured a great piece from Harvard economist Sendhil Mullainathan. The piece was called “Why Investing is So Complicated, and How to Make it Simpler.” In it, Mr. Mullainathan discusses his own feelings and anxiety surrounding his investments and his retirement planning.
Mr. Mullainathan discusses a number of feelings that I commonly see in investors. He feels guilty for procrastinating and feels anxious because he doesn’t understand the jargon. He wonders why it all has to be so complicated. He then touches on a number of potential solutions for the financial industry. Never once in the article, though, does he address the true source of his anxiety.
In the article, Mr. Mullainathan acknowledges the irony in a Harvard economics professor being confused by investing. He writes:
I seemed to have fallen into a recurrent nightmare, one in which I am taking a final exam in a class I never attended and a subject I don’t understand. This was even more embarrassing: I am, after all, a trained economist. When new acquaintances learn what I do for a living, they routinely ask, “So how should I invest my money?” I wish I knew.
To Mr. Mullainathan’s thinking, the problem lies in the nature of the investing world. Investments are too confusing. Investment managers aren’t incentivized properly. Financial advisors don’t give the right advice. There isn’t enough clear information available to investors.
Some of those points may be valid, but they don’t really address the true nature of Mr. Mullainathan’s situation. The real issue isn’t the investment industry or products or information. The real issue is Mr. Mullainathan’s own behavior as an investor.
In the opening paragraph of the article, Mr. Mullainathan admits that he hasn’t really focused on his investments and that he even needed support to get his login credentials for his accounts. He says he doesn’t work with an advisor and has picked his own mutual funds, although he’s not sure why he picked the funds he did.
Mr. Mullainathan’s argument is akin to blaming weight gain on the equipment in the gym, when the real issue is that you haven’t been to the gym in a long time and you don’t work out with a trainer.
In the end, Mr. Mullainathan decides that a target fund is the solution. With a target fund, he can simply pick the year he wants to retire and then the fund will automatically reallocate the funds over time. In some situations, target funds may be the right solution.
However, in Mr. Mullainathan’s case, a target date fund won’t change the fact that he doesn’t work with a knowledgeable advisor and doesn’t take the time on his own to monitor his investments. Unfortunately, I see this mistake all too often. Investors believe that a simple product will fix their problems, when, in fact, it’s the investor’s behavior that needs to change.
Financial advisors are so valuable not because of the products they offer, but rather because they keep an investor’s behavior on track. A good advisor can provide the logical, reasonable advice that an investor needs to hear right before they make an unwise decision. A good advisor can clarify goals and identify obstacles. A good advisor can lay out a roadmap and then guide an investor down the path.
Mr. Mullainathan was right to feel anxious. But a more effective solution may have been to find a financial advisor or coach whom he trusts. By laying blame on the products or the industry, he missed a golden chance to correct his own behavior.