How to Think About Money Quotes

“We’re influenced by how issues are framed. Many 401(k) plans no longer ask employees whether they want to contribute. Instead, they ask employees if they want to opt out of participating. If we were rational, it wouldn’t matter how the question was framed. But in this case, it produces a radically different outcome. By asking employees if they want to opt out, 401(k) plans tap into our tendency toward inertia and make participation appear to be the norm. Result: Many more employees put away money for retirement. Similarly, we can be influenced by how investment gains and losses are framed. We might be told that, “over the past 50 years, stocks have made money in 75 percent of all calendar years.” Alternatively, we might be told that “over the past 50 years, stocks have lost money in 25 percent of all calendar years.” The two sentences tell us the same thing—yet the first description makes stocks seem more appealing.”
― Jonathan Clements, How to Think About Money

“We base decisions on information that’s easily recalled. Airplane crashes make the news, so we are more fearful of flying than driving, even though car accidents cause many more deaths. Similarly, we hear a lot about investment legend Warren Buffett and a lot about lottery ticket winners, which makes beating the market and winning the lottery seem far more likely than they really are.”
― Jonathan Clements, How to Think About Money

“We’re too focused on the short-term. Experts keep advising us to save and invest, so we can retire in 20 or 30 years. And yet we remain almost exclusively focused on the here and now. Is there a new toy we’re hankering to buy? To persuade us to postpone the purchase for a mere 12 months, somebody would likely have to offer us a huge financial incentive. We are also overly influenced by recent events, including the latest political news, the current crop of economic data, and whether the financial markets have lately been rising or falling. We ascribe great importance to the days and weeks ahead, and not nearly enough to next year, let alone the next 10 years.”
― Jonathan Clements, How to Think About Money

“If you want a reality check, take a look at the study that’s regularly put out by S&P Dow Jones Indices, part of McGraw Hill Financial. The study is known as the SPIVA Scorecard, short for Standard & Poor’s Indices Versus Active. It compares actively managed funds to appropriate benchmark indexes. Over a 10-year period, typically 20 percent or less of actively managed funds outperform their category’s benchmark index.”
― Jonathan Clements, How to Think About Money

“If the economy slows, dividends and especially corporate profits may fall in the short-term, which could potentially make valuations appear less attractive. One solution: Focus less on trailing 12-month reported earnings and more on inflation-adjusted earnings for the past 10 years. The latter is the denominator used in the so-called Shiller P/E, named after Yale University economist Robert Shiller.”
― Jonathan Clements, How to Think About Money

“Our financial decisions aren’t purely financial. Like ordinary consumer purchases, financial choices have three benefits: utilitarian (what it does for me), expressive (what it says about me) and emotional (how it makes me feel). As we manage our finances, we might insist our goal is strictly utilitarian, and that all we want to do is make money. But in truth, we often make decisions for expressive or emotional reasons, and these other motivations can hurt our stated goal of greater wealth.”
― Jonathan Clements, How to Think About Money

“We believe the secret to investment success is hard work. Activity, we figure, will bring success, whether it is diligently reading corporate annual reports or trading rapidly throughout the day. While all this activity might give us the illusion of control over our investment results, it is more likely to hurt our performance, as we rack up hefty trading costs and make large undiversified investment bets.”
― Jonathan Clements, How to Think About Money

“We take credit for our winners, while blaming our losers on others. If we buy an investment and it goes up, it was our brilliant choice. If it goes down, it’s the fault of our broker, or those clowns in Washington, or that idiot on television we listened to. This delusional reaction to winning and losing reduces the chances that we will learn from our mistakes, while further bolstering our self-confidence.”
― Jonathan Clements, How to Think About Money

“We favor familiar investments. This might include shares of our employer, companies that compete in the industry where we work, corporations that are headquartered near our home and companies whose products we use. The familiarity makes these stocks more comfortable to own, but the result is often a badly diversified portfolio with a lot of unnecessary risk.”
― Jonathan Clements, How to Think About Money

“We find stories more convincing than statistics. Academic studies tell us that value stocks—those shares that are cheap based on market yardsticks like price-earnings ratios and dividend yield—outperform growth stocks, despite the latter’s rapidly increasing earnings and sales. But academic studies are no competition for a good story: We are still drawn to hot growth companies with their slick innovations and adoring customers.”
― Jonathan Clements, How to Think About Money

“What does this mean in practical terms? Let’s keep things simple, ignore private equity and commercial real estate, and focus just on the broad stock and bond market. You might buy three funds: an index fund offering exposure to the entire U.S. stock market, an index fund that will give you exposure to both developed foreign stock markets and emerging stock markets, and an index fund that owns the broad U.S. bond market. Suppose we were aiming to build a classic balanced portfolio, with 60 percent in stocks and 40 percent in bonds. Here are some possible investment mixes using index funds offered by major financial firms:     40 percent Fidelity Spartan Total Market Index Fund, 20 percent Fidelity Spartan Global ex U.S. Index Fund and 40 percent Fidelity Spartan U.S. Bond Index Fund. You can purchase these mutual funds directly from Fidelity Investments (Fidelity.com).     40 percent Vanguard Total Stock Market Index Fund, 20 percent Vanguard FTSE All-World ex-US Index Fund and 40 percent Vanguard Total Bond Market Index Fund. You can buy these mutual funds directly from Vanguard Group (Vanguard.com).     40 percent Vanguard Total Stock Market ETF, 20 percent Vanguard FTSE All-World ex-US ETF and 40 percent Vanguard Total Bond Market ETF. You can purchase these ETFs, or exchange-traded funds, through a discount or full-service brokerage firm. You can learn more about each of the funds at Vanguard.com.     40 percent iShares Core S&P Total U.S. Stock Market ETF, 20 percent iShares Core MSCI Total International Stock ETF and 40 percent iShares Core U.S. Aggregate Bond ETF. You can buy these ETFs through a brokerage account and find fund details at iShares.com.     40 percent SPDR Russell 3000 ETF, 20 percent SPDR MSCI ACWI ex-US ETF and 40 percent SPDR Barclays Aggregate Bond ETF. You can invest in these ETFs through a brokerage account and learn more at SPDRs.com.     40 percent Schwab Total Stock Market Index Fund, 20 percent Schwab International Index Fund and 40 percent Schwab Total Bond Market Fund. You can buy these mutual funds directly from Charles Schwab (Schwab.com). The good news: Schwab’s funds have a minimum initial investment of just $100. The bad news: Unlike the other foreign stock funds listed here, Schwab’s international index fund focuses solely on developed foreign markets. Those who want exposure to emerging markets might take a fifth of the money allocated to the international fund—equal to 4 percent of the entire portfolio—and invest it in an emerging markets stock index fund. One option: Schwab has an ETF that focuses on emerging markets.”
― Jonathan Clements, How to Think About Money