Flight #63 - Dumb Things Smart People Do with Money

Questions from the flight deck:

·        Next year all 401k catch up contributions will be Roth.  How will this affect your taxes?

·        https://www.kiplinger.com/taxes/the-problem-with-401k-catch-up-contributions

o   Under SECURE 2.0, if you are at least 50 years old and earned $145,000 or more in the previous year, you can make catch-up contributions to your employer-sponsored 401(k) account.

o   But there’s a catch. You would have to make those extra contributions on a Roth basis, using after-tax money.

o   You wouldn’t be able to get tax deductions on those catch-up contributions as you would with typical 401(k) contributions, but you could withdraw the money tax-free when you retire.

Dumb Things Smart People Do with Money

·        Vanguard’s Advisor’s Alpha – They say most value is from behavioral coaching.

o   https://advisors.vanguard.com/advisors-alpha#overview

·        Buy High – Sell Low – why?

·        Example: Value investment premium – Part of premium could be from our human behavior that seems to persist and is not arbitraged away. 

o   “According to the behavioral school of thought, human tendencies are behind the existence of the value premium. Many investors are lured by the appeal of companies with exciting growth stories and prospect of strong short-term returns, while being deterred by those that receive little fanfare or are unloved by the masses.”

§  From article by Investment Firm Robeco.

·        “Human instincts drive the Value premium”

·        Recency bias – Recency bias is the tendency to put too much emphasis on recent events, such as a stock-market rout, the meteoric rise of bitcoin or a meme stock such as GameStop, for example.

o   The “Lost Decade” is mostly ignored due to lack of recency.     

o   “The term “Lost Decade for Stocks” refers to the ten-year period from 12/31/1999 through 12/31/2009, when the S&P 500® generated an annualized total return of -0.9% over the period. This was only the second time that the market actually had a negative total return over a decade period.”

·        Average investor performance vs. The investment’s performance – ARKK.

o   See Pilot Money Guys Podcast/Flight #30 “Chasing Hot Stocks – Investing in the Rearview Mirror”

·        Morningstar’s “Mind the Gap...”  https://www.morningstar.com/lp/mind-the-gap

·        Morningstar Article:  “Bad timing cost investors one fifth of their funds’ returns” 

Morningstar investor research firm recently published an article titled, “Bad Timing Cost Investors One Fifth of Their Funds’ Returns