GuidePost - Vol. 4, Issue 3 2008

The GRABot BAG
by Sherrie E. Grabot, CEO

March 2008
Market Wrap-up: The good, the bad, and the crazy

Even in the best of times, it’s hard enough to be good. The easy way, the no-brainer, and the quick score seem categorically more attractive than what we know is the smart move – from the serpent in the original garden, to leveraged trading in mortgage-derived securities.

In a major downturn, the bad ideas just seem to rise up and proliferate. While I wish I had some good news to report instead, the following roundup of retirement-related bad ideas does at least contain some virtue; as an object lesson, as motivation for change; or simply to help explain why we do the crazy things we do.

Bad ideas that won’t go away

A number of retirement-related issues have come up lately that just will not die. These ideas range from a few years old to a million or more. They have at least two things in common: they all threaten responsible retirement investing; and they’re all egregious enough to belong in some sort of Museum of Bad Ideas.

Burn your savings with just one swipe
Leading the list is the idea of a 401(k)-based debit card. This is touted as a hassle-free way to borrow from your retirement savings. The scheme works by having a loan from your plan account approved up front, to provide ready funds for the card. But there’s a very good reason why applying for a loan is a hassle in the first place: it’s a bad idea, and the powers that be want to discourage would-be borrowers from tapping their life savings.

The concept is not new. The brainchild of an eccentric inventor and an MIT economist, the actual product has been around since 2003, and the idea was in development for many years before that. Opposition has been fierce at times, largely because it’s a truly stupid idea for consumers. As one commentator pointed out, it’s even worse than credit card debt, because the money is expensive to get, and it prevents your nest egg from growing at the same time.

Unfortunately, a substantial market for such a thing undoubtedly exists. A recent study found that 18% of employees took a loan from their retirement plans in 2007, up sharply from 11% in 2006.

Bad company
Next up is company stock. Or rather, investing too much in the stock of your own company. The most recent example is the way the ongoing credit disaster has decimated the savings of thousands of Wall Streeters. As the Motley Fool points out, it’s not just those at the top of the food chain who suffer. The chairman of Bear Stearns may have lost $400 million. But the rank-and-file employees of the firm collectively own 30% of its stock, and most of those who have seen their net worth evaporate have far fewer resources than their boss does.

The Fool cites a number of other disturbing statistics. When Enron collapsed back in 2000, its employees had about 60% of their retirement plan assets in the company. But a year later, employees of companies like Proctor & Gamble, Pfizer, and Anheuser-Busch still had more than 80% of their assets in company stock. And according to FINRA, in 2006 one third of eligible employees held company stock as more than 20% of their balances, the upper limit set by conventional wisdom. Almost 9% nationwide had an amazing 80% or more.

In our own experience, we’ve found that when a company provides objective investment advice through GuidedSavings, participation in stock plans becomes far more balanced.

Instant gratification
Today’s last Bad Idea is not a trend or a product: it’s built into your brain. Specifically, it’s the neural circuitry that’s hard-wired for instant gratification. A recent article reviews some innovative neurological research on the perceived “subjective value” of immediate rewards versus delayed ones. From fruit juice to Amazon gift cards, they found that the brain becomes more excited about getting something right now, than about the prospect of a larger reward in the future.

To quantify a bit: the thought of $20 today lights up your brain on the MRI machine more than $23 in three weeks or $47 in six months. If you’re counting, that’s an annualized rate of about 4,800% over the first three weeks. It’s hardly a realistic assessment of opportunity cost, but hey, it’s biology.

The author points out that this phenomenon made more sense for our hunter-gatherer ancestors than for ourselves. Their food supply was very unstable, so life had an understandably short-term focus. And if they had even been able to consider a retirement horizon, it might have had a saber-toothed tiger lurking on it.

We’ve come a long way since those days. Let’s hope we can continue to survive as a species – despite such disastrous innovations as war, high cholesterol, and the 401(k) debit card.

~~ Sherrie