personal finance

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“I have not looked at any of my holdings and don’t intend to. I don’t want to be tempted to jump because I think I’d be more likely to jump in the wrong direction than the right one. My advice has always been to choose a sensible diversified portfolio and stop reading the financial pages. I recommend the sports section.”

In Business Week.

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Do comprehensive pictures of your finance help keep you out of debt? Guest blogger Julia Thomson thinks so. Online brokerage accounts often offer up-to-the-minute portfolio values, but Thomson has a much more comprehensive idea in mind, one involving all of someone’s assets and liabilities. Thomson is a former financial adviser, recently retired, who lives in Arizona with her husband, Gerald — “an Econ in the flesh,” she says.

Click here to read Thomson’s post.

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Jay Ritter, the Cordell Professor of Finance at the University of Florida, sends some thoughts along in response to a piece about financial literary in this week’s Economist that features Nudge. Even professors of finance need a nudge sometimes!

1) I remember in 1990 or so telling a fellow finance professor that I didn’t really know how to do the lease vs. buy decision for an auto purchase. (Once I started teaching leasing, I figured this out.) He admitted that he didn’t know either.

2) And I remember how my first wife, with an MBA from Michigan, didn’t understand the basics of how to minimize interest payments on credit cards (pay off one in its entirety each month, and charge current purchases to that card, so that we didn’t have to pay interest immediately on each new purchase).

3) Last October I advised my brother, a successful small businessman, on taking out a mortgage. He didn’t realize that the implicit interest rate that he would be paying was over 33 percent per year on the monthly cash payment saving if he took out an interest-only mortgage. I was able to figure this out quickly, but I knew it had to be a high number because of the adverse selection problem that exists with the consumers who are taking out interest-only mortgages. His mortgage broker probably couldn’t have figured this out, even if she had the correct incentives to do so.

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We have long advocated automatic enrollments in 401(k) plans as a way to help people save more for retirement. We (along with others) have produced research showing how poorly most people make investment decisions, either by naively diversifying, by chasing past performance, or by loading up on company stock.

As more companies adopt automatic 401(k) enrollment thanks to new congressional law, individual investment decisions (and biases) will become even more important. In today’s New York Times, benefits consultant Ted Benna says teaching people personal finance has been a tougher challenge than many financial advisers originally thought. “When 401(k)’s started, he said, ‘we thought we could educate most people to manage their retirement accounts.’ But as it has turned out, most people prefer a ‘set it and forget it approach,’ for which target-date funds are ideal.”

Target-date funds are ideal for younger investors and those without large retirement nest eggs. Rather than use a single form that requires individuals to choose individual mutual funds for their portfolio, should companies use two forms – a basic default form and an advanced form. After filling out basic demographic information, the basic form would ask one question: At what age, approximately, do you plan to retire? Individuals would be enrolled in the appropriate target-date fund based on their answers. More advanced investors could choose the form that allows the flexibility in picking funds.

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