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October 8, 2014

Sell-offs, Brain Scans, and Lawyers - Oh My!

Here are some of the latest must-read news items for retirement investors.

1. The Great Market Sell-off

As you already know, the beginning of October saw an absolutely epic sell-off on the stock market. If you were not aware of this, you will be when you see your next statement. (If you need a bottle of bourbon to deal with it, may I suggest Eagle Rare.) If you’re a regular follower of this blog, then you most probably don’t want to hear we told you so. Let’s move on.

2. New Insight into Investor Psychology

Bloomberg reported on a burgeoning field of therapists and advisors that help treat investors who find themselves plagued by emotional decision making when dealing with their investments. The methods listed for dealing with the problem included removing or limiting investor control, as well as investors learning to recognize their emotional states. This article was a serious one, and the people it described were all sincere investors. However, even the most sincere of efforts can be hampered by a faulty premise. What’s the problem? The article assumes that when investors conduct their stock trading in a volatile and irrational manner, the fault lies with them and not with the market itself. This couldn’t be further from the truth. The stock market itself is exceedingly volatile and irrational, and it makes sense that it would engender similar feelings in its proprietors. After all, stocks values are based on consumer sentiment which in turn is dictated by the value itself which in turn depends on the buying and selling of consumers to… Well, let’s just suffice it to say that a self-regulating feedback loop can be extremely chaotic. The article also takes for granted that there is indeed a conversely “rational” approach to the stock market that can guarantee a positive outcome. This is simply not true. Numerous studies measuring the efficacy of stock picking or various investments techniques have shown that there is no guarantee of efficacy. If anything, the outcomes of these various methods are usually on par with random stock selection. Even the time honored wisdom that the best thing to do is invest in a diversified stock portfolio and then leave it alone for a very long time is also suspect. For many years the historical data seemed to verify the concept, but recently we saw years which proved to be exceptions. A fascinating read on this topic can be found in the book “Pound Foolish” by Helaine Olen.

3. Lawyers and 401(k)s

They got you coming and going, right? The Supreme Court is currently contemplating whether or not workers can sue their 401(k) providers for excessive fees as a result of improper fund selection. The case involves an appeal made by Edison International workers, and it will be decided sometime over the next nine months. The winners in this case will be either the fund managers or the lawyers, but the important thing is that justice will have been served. (Ha!) This brings to mind the old maxim “Fees, fees everywhere and not a drop to drink.”

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