How can watching a Brad Pitt movie save your 401(k)?
17 Jul 2017
Brad Pitt plays Billy Beane, the general manager of the Oakland A’s (based on the 2002 Oakland Athletics season) in the film Moneyball. In the movie, Billy is tired of the “traditional decision making” that his baseball scouts have been making and decides that the “stakes are too high” and “cleans house” by using new decision making techniques based on statistical analysis. I thought to myself, “how can the average investor use these strategies to help them in the “high stakes” game of investment picking they’re playing inside their 401(k).
As of 2012 there were 52 million American workers active in 401(k) plans. A Metlife retirement income TV show pointed out recently that in 2008 the average 401(k) lost 42%. What? A 42% average loss in American 401(k) values? I do seem to remember that some people were calling them 201(k)’s back then. Of course, if you’ve listened to the our advisors on WMT 600AM/WHO 1040AM or attended one of our retirement classes at the local Junior College, you would have heard us say, “if you lose 40%, you have to make 67% on the way back to get your money back, and this could take some time.” By my estimation, it took the average American worker 4.5 years to get their money back after 2008 (not counting their own contributions). Here at PII, we don’t want that to happen again to 401(k) participants. The average 401(k) balance in 2015 (based on a CNN/Money study) was $96,288. If you lose 42% of $96,288 that’s -$40,440…OUCH!! So how can Brad Pitt help you save your 401(k)? Let’s turn to the 3 standard mistakes people make, when they’re making “high stakes decisions” (based on research available on the “Psychology of Decision Making” by the late Psychologist Amos Tversky). See if you can avoid some of these mistakes the next time you’re making a decision about your 401(k).
- People are too overconfident in their decisions:
- Professor Terry O’Dean of UC Berkley analyzed over 10,000 brokerage accounts of individual investors who bought and sold stocks. Out of the 163,000 trades made by individual investors over 7 years only 3.2% of those investors had better returns after 1 year.
- People make forecasts that are too extreme:
- A hedge-fund company out of New York City named Protege Partner’s bet Warren Buffett $1,000,000 that they could outperform the Vanguard 500 Index fund over a 10-year period of time. 9 years into the bet, “Warren the Great” is on top once again.
- The winners curse:
- A lack of information about the value of an item purchased at an auction will lead people to “win” the item, but be “cursed” because they paid too much for it.
- Before the DOT.COM bubble in 1999, with much excitement and anticipation, Investors bid up the Initial Public Offer price of then company Pets.com to $11/share (even though Pets.com had no workable business plan and had not done any market research). Only to have the share price fall to 19cents/share 268 business days later at the announcement of the Pets.com liquidation.
Good Luck! – Jonas
These are the opinions of Jonas Everett and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.