Created by Erica Abbott USU Family Finance Student and Dr. Jean M. Lown

Last October’s FPW program is available at www.usu.edu/fpw under past presentations

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Handout: PF Action Plan

• • • For your use Commit to take action Share your plans with family & friends 3

Why do investors earn less than market returns?

• • • Studies confirm actual investors earn below market returns. Why? DALBAR: “ average investor earns less - in many cases, much less - than mutual fund performance reports would suggest.

” Past 15 years: investors in US stock funds earned 2.3% less than the funds themselves (Morningstar report) 4

What investors do wrong & why

• • • • React emotionally to $ news Buy when news is good & prices high Sell when news is bad & prices low Jeff Salisbury’s tuna fish analogy – Load up the pantry when canned tuna is on sale – Buy little or none when price is high 5

7 Deadly Sins of Investing

(Kip. Nov. p. 30) 1. Following the herd 2. Giving in to fear 3. Hanging on too long 4. Neglecting to rebalance 5. Making things complicated 6. Paying too much in fees 7. Failing to stick to the plan 6

1. Following the herd

• • When an asset class soars… investors pile in – After the price has risen – Buy high (& sell low) – “Past performance is no guarantee of future returns.” What to do: “Follow rules, not herds” – Don’t be swayed by CNN, Jim Cramer, etc.

– Dollar Cost Average each month on autopilot 7

2. Giving in to fear

• • • • 2008-09 financial market meltdown--> avoiding stocks Volatility is scary but losses are only on paper

until you sell

Federally insured accounts don’t keep up with inflation & taxes Need stocks for long term goals 8

Solution: Focus on Long Run

• • • Since 1926 US stocks (S&P 500) averaged 10%/year (before taxes & inflation) – Lots of volatility along the way but upward trend Worst case- Invested @ peak: March 2000 – 2 horrendous bear markets – Positive 3.4% annual return Stock market is place for long term $ 9

3. Hanging on too long

We become psychologically invested in what we own… Own a winner? Can‘t part with it Own a loser? To sell would reinforce the pain 10

Redemption

• • • Have a sell strategy Review investments yearly For stocks/funds you own- would you buy it today? – No? sell part or all – Adopt a target price to sell 11

4. Neglecting to Rebalance

Manage risk by diversification & Asset allocation Establish a % share for each asset category based on risk tolerance & time horizon 12

Redemption

• • • It may be counterintuitive but..

Rebalance each year by – Sell some winners and buy some from loser category, or – Buy only in the loser category Forces you to Buy Low & Sell High!

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5. Making things complicated

• • • Too many different investments Resembles an index fund but… – At much higher cost Redemption: buy index mutual funds or Target retirement date funds – Kiplinger 25 (list of “best” funds) – Money 70 (list of “best” funds) 14

6. Paying too much in fees

• One thing you can control: expenses $10,000 & invest $500/month @ 8%/yr. For 30 years Index fund 0.20%: $818,639 Active fund 1.2%: $662,916 Difference: ~$156,000 15

Redemption

• • Compare expense ratios of mutual funds – FINRA fund analyzer http://apps.finra.org/fundanalyzer/1/fa.aspx

Consider the buy/sell costs of stock trades – Full service broker: $75/trade – Discount broker: $10/trade 16

7. Failing to Stick to Your Plan

• • Greatest sin: failing to formulate & follow a plan – No plan- how will you know if you are on track? – Specify your goal (SMART) & time line – Having a plan helps you resist the other “sins” What are YOUR goals? Time horizon? Plan? 17

Behavioral Principles http://www.ideas42.org/category/theory 18

Limited Attention

• • Can’t text, listen to music & drive… humans are not good at multi-tasking!

When attention is stretched, people have difficulty focusing on benefits & consequences of options.

– Default options (instead of too many choices) – Automatic saving/investing 19

Status Quo Bias

• • Comfortable & familiar Change the default through… – Retirement auto enrollment • Few opt out – Target retirement funds • Diversified, choose year of planned retirement 20

Mental Accounting

• • • • • Assigning $ to different buckets: rent/mortgage, car payment, etc.

Plus- prevents spending the rent on dinner out Minus- using credit increases spending up to 18% over cash. Such outcomes are difficult to avoid as most credit decisions are ambiguous Linking saved money to a particular goal –i.e., college –makes us reluctant to spend the $ for other things

Take away: 529 UESP College Savings accounts

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Social Norms

• • • • • “If everyone else jumped off a bridge…” Teens aren’t only ones who care about what everyone else is doing. Knowing what others do provides a reference point against which people can compare options when they are unsure about what to do.

We misperceive social norms, esp. when some choices are highly visible & others aren’t a clearer picture of what constitutes “normal” behavior for peers, friends, neighbors, or citizens can make us more inclined to do same.

Take away: save 15% of income 22

Planning Fallacy

• • • We underestimate amount of effort & time to complete a task.

makes it hard to do things like signing up for retirement savings Take away: Commit to action & tell friend/spouse/partner/coworker to – Hold your feet to the fire 23

Prescriptive & Descriptive Fallacy

• • • • We know what we should do… Wash hands, offer pregnant women seat, but… Instead of telling people what they should do, simply inform people of descriptive norms— what the majority of people actually do. R: knowing what other people do is a stronger influence on how they eventually behave than knowing what society says they should do 24

Procrastination

• • • • • When’s the most popular day of the week to start a diet? Start/increase saving/investing?

Tomorrow.

The more steps involved, the more likely someone is to procrastinate.

Too many choices  procrastination Take away: acknowledge & commit 25

Self-Control Problems

• • • • At some point even the most disciplined person will succumb to temptation. – We have good intentions, but poor follow-through.

Especially true where future gain (more financial security) comes at cost of up-front loss (saving instead of spending) Take away: retirement withdrawal penalties CD/I-bond withdrawal penalties 26

Choice Overload

• • Too many choices can be overwhelming. – People make poor choices or fail to choose – Jam research study Get help in choosing!

– Enlist the help of knowledgeable person • Retirement accounts- more choices is NOT better • Focus on the basics 27

Availability & Representativeness

• • • Present choices in a way that highlights the

important context

Indicating life expectancy of a population can help people make better decisions about whether they should claim Social Security benefits at age 62 or 67 & prevent people from miscalculating probability that they would not benefit from waiting.

Take away: You are unique. Estimate your life expectancy w/ online calculators 28

Problem: Saving requires attention & self-control

• When $ is tight, mental resources needed to save are stretched thin, too. – Behavioral interventions such as automatic transfers to savings or reminders about savings goals 29

Emotions Get in the Way

• • • Fear & Greed/exuberance Fear -> excessive risk aversion 2008-09 huge outflows from stocks – Market bottomed in March 09 & quickly shot up – Investors who sold locked in their losses & sat on sidelines while the markets rallied 30

• Awareness: Realize that you want to change or improve something • Your Ability to change: • Is this something you can actually control?

• Do you need someone else to change with you? i.e. a spouse?

• Ambition: Consider your desire to change • Is it strong? Are you on the fence about it? • Attitude: Positive? Negative? Back and forth?

• “Nothing can stop the man with the right mental attitude from achieving his goal…” – Thomas Jefferson • Action: Start implementing the actions that you would need to change certain behaviors Small Steps to Health & Wealth 31

• Write your goals down where you will see them • “Goals that are not written down are just wishes.” -Author Unknown • Websites send you reminders about your goals • Stickk.com

• Mint.com

: Sends cell phone reminders when you go over budget. Plus gives you updates on your goals!

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• Focusing on too many things is overwhelming • Paying off debt, savings, retirement, down payment on a home, etc. Which should come first?

• It might be better to focus on one primary goal at a time 33

• • • Helps remind you of your goals Seeing progress is motivating Gets your family involved • Positive peer pressure 34

• • Use a phone app – Mint.com

• Use a savings thermometer Tickers from websites – Tickerfactory.com

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• • • McDonald’s allowed credit card purchases increased average purchase from $4.50 to $7 Journal of Experimental Psychology: “Cash discourages spending, and credit or gift cards encourage it…” Credit card users spend 12-18% more when using credit instead of cash (Dun & Bradstreet) – Spending increases even more when credit card offers rewards or cash back 37

• • “…losing something makes you twice as miserable as gaining the same thing makes you happy.” Nudge by Thaler & Sunstein Paying with cash induces a feeling of loss, whereas swiping plastic, only to put it back in your wallet, does not 38

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• • • Set up automatic deposits to savings, investments, & bill payments Once it’s done, you don’t have to think about it anymore!

Biggest step is making the time to set it up – “Execution” 40

Autopilot: Dollar Cost Averaging

• Automatically invest same amount every pay period – Regardless of market gyrations – Removes the emotion & temptation to subvert your plan – Eliminates the need for willpower 41

• Pre-commit to a decision - Consumers are more impatient in the near term than in the long term - Seek instant gratification

- Feed the pig next month

- But sign up today! 42

• We’ll commit to saving $100 five weeks from now, but we won’t commit to saving $100 this week. • How to create a good habit: – Sign up to increase (or start) your 401(k) contributions (emergency savings, power payments, student loans, & credit card payments) starting in a few weeks or months You’re less likely to undo that decision & more likely to start a good habit 43

“Unless commitment is made, there are only promises and hopes…but no plans.” -

Peter Drucker 44

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Put your mind to it

“One of the most powerful motivational strategies to… increase wealth is visualization. People can alter their lives just by altering their mindset. Visualization (a.k.a., mental imagery) is a powerful step in the process of setting and achieving goals.” SSHW What is your vision for your goal?

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Commit to Making a Change

(SSHW) • 5 stages of change (Transtheoretical Model) 1. Precontemplation- unaware 2. Contemplation- recognize need to change 3. Preparation- Commit to make changes 4. Action- take the plunge & make changes • 5. Maintenance- sustain change & reap benefits Studies show that “plans to change” can predict actual change. 47

• • Telling others about your goals & plans helps you stick to them Regular reminders from family & friends increases likelihood of success – Self-inflict peer pressure to improve your financial situation!

– Failure to follow through will result in your anti-charity receiving a donation from you!

– Sign your contract today!!

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• • • www.StickK.com

If you don’t do ‘X’ you’ll have to pay ‘Y’ to an ANTI-charity of your choice Recruit a trusted friend as your referee Use for goals such as paying off debt, starting retirement, sticking to your budget, weight loss, smoking cessation, etc. 49

Resources

• • Kiplinger Nov. “How to be a better investor” Small Steps to Health & Wealth http://njaes.rutgers.edu/sshw/ – Overcoming Obstacles and Taking Action – Behavior Change Strategies – Set a Date and Get Started---Just Do It 50

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Upcoming FPW

November 13: Estate Planning – Quit procrastinating!

– What you need to do & resources to accomplish No December program 2014 topics – Utah’s health policy project- navigating insurance – Financial planner Lon Jeffries – Invest in your house: Upgrades that make sense – Social Security 51

Sign up to follow the FPW Blog

• • • • http://www.fpwusu.blogspot.com/ Searchable Latest info & advice Answers to your financial questions 52

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Curious Behaviors…

• • That can ruin your retirement http://crr.bc.edu/special-projects/interactive tools/curious-behaviors-that-can-ruin-your retirement/ 54