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NEWS POSTED to TTM.US.COM 7/26/12
Why are Americans avoiding stocks? Experts in the field of behavior finance have a few ideas
By Matthew Craft, AP Business Writer | Associated Press – Sun, Mar 11, 2012 12:18 PM EDT
The headlines say the financial crisis is behind us. The Dow is back to pre-financial crisis levels. Layoffs are the slowest since the financial crisis, and car sales the highest since the financial crisis.
So why are Americans still too scared to get back in the stock market?
Because all they hear is "financial crisis."
Every comparison to 2008, even a comparison that's supposedly good, stirs memories of 2008. For some people, it rekindles the fear of losing a job or a house. For others, years of retirement savings swallowed by a plunging stock market.
So say the experts in the budding field of behavioral finance. Professional investors and money managers may be baffled that Americans are shaking off the good news. But people with a background in psychology are hardly surprised.
A broad measure of the stock market, the Standard & Poor's 500 index, is up more than 20 percent from last October. The index has more than doubled since March 9, 2009, the low point for stocks during the Great Recession.
But everyday investors refuse to jump in. They pulled $19 billion from funds that invest in U.S. stocks in December, according to the Investment Company Institute, and $2 billion more in January.
"In the old days, if there was a market rally, people would call and ask to put more money in. They felt they were missing the party," says Deborah DeMatteo, an independent wealth manager at 10-15 Associates in Goshen, N.Y.
This time, investors seem more than happy to miss the party.
"Now, people call and ask, 'When is it going back down?'" DeMatteo says. "There's a sense of doom."
What are they thinking? It's a question fit for a shrink.
Market psychology is still psychology, which is why Wall Street banks and investment firms pay people like Richard Peterson, a psychiatrist with a medical degree from the University of Texas, to help make sense of it.
A variety of emotions and thought processes are keeping Americans out of the stock market, Peterson and other experts say. The memory of 2008, when the Dow Jones industrial average swung wildly by hundreds of points a day, is probably No. 1.
The tumult of that year stamped itself in many people's brains. Like survivors of a devastating earthquake, they carry those events with them.
"A traumatic memory gets seared in the brain," Peterson says.
In this case, the wound is easily irritated. News that reminds people of the financial crisis — debt problems in Europe, a sudden swing in the market — sets off the same emotions of fear or anger. Getting your fear button pushed that often is exhausting, Peterson says.
People eventually tune out to save their sanity.
"Fear is still with us," says Meir Statman, a professor of finance at Santa Clara University in California and a leading expert in behavioral finance. "We live as if it's still 2008."
Statman sees a few other impulses at work. One is a habit of thinking that selects an event and uses it as the basis for understanding everything else. "We look at something and ask, 'What is this similar to?' Statman explains.
In good times, this leads to the folly of "return chasing" — expecting an investment, sports team or pickup line to be successful simply because it proved successful in the past.
People usually do this kind of extrapolation from recent events. But Statman suspects many are using the more distant memory of 2008 because it feels closer. "I think that what's vivid in people's minds is not last year but 2008," he says.
As a result, they respond to events as if it were September 2008 and Lehman Brothers were about to collapse all over again. In this case, Statman says it's not fear that's driving people but an error of reasoning.
Last summer, for instance, a fight over raising the federal government's debt limit led Standard & Poor's to strip the United States of its top-flight AAA rating. The markets went wild. For the month of August, the Dow swung an average of nearly 2 percent every day.
Harvey Rowen, chief investment officer at Starmont Asset Management in San Francisco, says clients called and wanted to cash everything out. "I'd tell them, 'You're going to take a loss,'" he says. "And they'd say, 'I don't care. I want out.'"
One client called with a demand to sell all his investments. He wanted Starmont to use the cash to buy gold bars, silver bars and Swiss francs and then cart them to his house. "We managed to talk him out of it," Rowen says.
Another habit that Statman sees at play is the confirmation bias. It's often used as a way to help explain the widening political divide in the U.S. between Democrats and Republicans.
Say you believe that the federal government's debts will cause the U.S. to go the way of Greece. Instead of looking for information that challenges this view, you stick to news reports that confirm your opinions.
"If you have evidence that goes against your beliefs, you dismiss it," he says.
Statman says it seems some people are looking to confirm a "doom and gloom" view of the U.S. economy. Point out that the economy grew at a 3 percent rate in the last quarter of 2011 and they'll change the subject.
Their view, he says, is: "This country is going down the tubes."
49% Of Americans Aren't Saving For Retirement
By Blake Ellis | CNNMoney.com
America has a serious problem saving for retirement.
About 49% of Americans say they aren't contributing to any retirement plan, according to a new survey conducted by LIMRA, a trade association for the financial services industry.
"The findings from this survey were disturbing, given that people will increasingly need to rely on their personal savings to make ends meet in retirement," said Matthew Drinkwater, associate managing director at LIMRA's retirement research division.
People ages 18 to 34 are the least likely to be saving, with 56% reporting that they are not currently contributing to a retirement plan like an IRA or a 401(k).
"In order to have the adequate savings necessary to meet their financial needs in retirement — which could last 20 or more years — it is critical that these individuals begin saving systematically early in their working years," Drinkwater said.
Nearly half of consumers said they aren't planning to contribute to an IRA because they can't afford to, and only a quarter of Americans have worked with a financial professional to plan for retirement, the survey found.
The study was conducted in April, and LIMRA surveyed 2,697 Americans.
Social Security, Medicare Trust Fund take a hit
By SCOTT BURNS
Can you spell i-c-e-b-e-r-g? Well, we've hit one, and our ship is taking on water.
Two weeks ago the trustees for Medicare released their annual report. The report, and the warnings it contained about the uncertainty of future costs, got some attention. But not nearly enough.
According to the report, the Medicare Trust Fund would be exhausted by 2024, only 12 years from now, under current law. Ditto the Social Security Trust Fund. It will be broke by 2033, 21 years from now. When the Social Security Trust Fund is broke, benefits will need to be cut by 25 percent. This, by the way, is the best-case scenario. As they did last year and the year before, the Medicare trustees express significant doubt that projected savings under current law will be realized.
Unfortunately, an event that appears to be more than a decade away doesn't seem like an oncoming iceberg to those in Congress. For them it is many elections away. So the report disappeared as quickly as a bad movie.
But if anyone had read beyond the headline numbers, they would have learned that the Medicare and Social Security iceberg isn't distant; it has already been struck. The figures to prove it are in the same report.
Every year since 2004, devoted readers of the trustees' report have found a section that explains how Social Security and Medicare trust accounting can be reconciled with the federal budget. This year it is Appendix F: "Medicare and Social Security Trust Funds and the Federal Budget." It begins on page 234. You don't need to be a CPA to understand this stuff. It clearly explains how the trust funds relate to actual federal finance. It shows what the politicians like to talk about — the trust funds. It also shows the actual cash flows we need to be worried about.
The feel-good story is that both Medicare and Social Security have reassuring trust funds that hold billions in Treasury obligations. The dedicated tax revenue that goes into the trust funds insulates them from the vulnerability that programs entirely supported by general revenues can experience. So if you are a senior on Social Security and Medicare, you are less vulnerable than most people who depend on federal spending.
But Appendix F tells us that Social Security and Medicare are becoming more dependent on general revenues at an alarming rate — to the tune of $402.7 billion last year. Last year is not 21 years in the future.
After years of surplus tax payments (mostly Social Security) that more than covered benefits, these programs now cost more than they receive in dedicated revenue. As a result, the surplus that allowed Democrats to do the spending they love — and Republicans to do the tax cutting they adore — is gone. Today, benefit payments are competing directly with other government commitments.
As I have pointed out in other columns, as long as the benefit costs of Medicare and Social Security were less than the taxes collected, things were fine. But the net cash cost of Medicare and Social Security — the amount by which benefit payments exceed dedicated tax collections — has nearly quadrupled since the last presidential election, rising from $108.7 billion to $402.7 billion. Since our total deficit is about three times that $402.7 billion figure, it is reasonable to say that our two largest government programs are now directly responsible for about a third of current government borrowing.
This gigantic shift has already happened. It is history, not projection. As recently as two presidential elections ago, the cash cost of Social Security and Medicare was practically nothing — a mere $41.1 billion.
The reported surplus of the trusts, mostly credited interest on their holdings of Treasury securities, shows a happy number. Politicians of both parties use these figures routinely. The actual cash impact is virtually never mentioned.
The iceberg isn't on the horizon. We've already hit it. Both parties should answer for it.
* Questions about personal finance and investments may be emailed to firstname.lastname@example.org or visit scottburns.com.
ING Study Reveals Challenging Retirement Realities for Women
May 3, 2012, 9:00 a.m. EDT
Women are less prepared for retirement than men – with nearly $41,000 less saved on average
WINDSOR, Conn., May 3, 2012 /PRNewswire via COMTEX/ — ING U.S. today released key findings from a study1 commissioned by the ING Retirement Research Institute that sheds light on the distinct realities women encounter when saving and preparing for retirement. The study, Retirement Revealed, underscores that women on average are significantly less prepared for retirement than men. To view the report, visit http://ing.us/rri/ing-studies/what-about-women .
To view the multimedia assets associated with this release, please click: http://www.multivu.com/mnr/54453-ing-u-s-retirement-research-institute-study-women-financial-planning
According to the study, among those who have savings in or outside of an employer-sponsored retirement plan, men have substantially more saved than women, a striking $149,000, on average, compared to women, who averaged $108,000 in total savings. For women with children at home2, this retirement savings figure dropped even further to $88,000.
A key driver of total retirement savings is the percentage of salary that individuals contribute to their employer-sponsored retirement plan. ING's study found that more women (42%) than men (34%) contributed just one to five percent of their salary into their plans. Fewer women (25%) than men (33%) have a formal investment plan to reach their retirement goals. In addition, well over half (56%) of women do not feel financially prepared for retirement, compared to only 42% of men.
"It is clear that many women – regardless of their age or life stage – must do more to save for their retirement," said Maliz Beams, CEO of ING U.S. Retirement. "The combination of living longer and saving less can hamper a woman's ability to reach her goals. Through this study and the work ING U.S. is doing to better understand women's distinct needs, we are focused on providing meaningful guidance so that more women take action to increase their retirement savings and, in turn, become more secure and confident about their future."
Mothers Are Challenged in Retirement Savings
ING U.S.'s study found that mothers face additional hurdles when it comes to building their retirement security. While the income gap between men and women has narrowed in recent years, mothers tend to spend more time out of the workforce due to caregiver responsibilities. This reality reduces their earning and savings potential and also lowers Social Security benefits. ING U.S.'s study found that:
The majority (60%) of mothers do not feel prepared for retirement and almost half (46%) don't know how to achieve their retirement goals.
Just over half (53%) of mothers have less than $25,000 saved in their employer-sponsored retirement plan.
Less than two-thirds (65%) of mothers are receiving their employer's full company match compared to more than three-quarters (76%) of fathers.
Single Women More Self-Reliant for Financial Planning
The percentage of single women 18 years or older in the U.S. has more than doubled in the last fifty years from 12 to 25 percent, according to the Pew Research Center3. These women may be managing day-to-day household expenses on their own, while also trying to plan and save for retirement. Among this group, ING's research found that:
More single women (69%) said they relied on their own research or family and friends for financial guidance than married women (63%) and single women were less likely to work with a financial professional (21%) than married, divorced or widowed women (31%).
Less than three-in-ten (28%) have calculated how much they'll need to retire, compared to half (50%) of men.
Approximately one quarter (26%) of single women spent some or a lot of time thinking about retirement, compared to a greater number (44%) of widowed/divorced women.
The study also found that women across the generations have differences in their approach to retirement and planning.
Gen Y (age 25-34) women are most likely to have barriers to saving (86%) compared to women 35 or older (74%) and more than half of Gen Y women (56%) have outstanding student loans.
Only a small number (6%) of Gen Y women put most of their extra money to retirement savings, whereas close to half (47%) put it towards entertainment or vacations.
More than half (54%) of women ages 50-64 have not calculated how much money they will need to continue their current lifestyle after retirement.
Only one-third (33%) of women ages 50-64 have a formal investment plan to reach their retirement goals.
"We can see that the financial planning needs and retirement savings goals of women reflect the demands of their lives, and for many it is a challenge to identify what needs come first," adds Beams. "Working with a financial professional can help women address and prioritize their distinct situations so they can be best prepared for retirement."
As a leading provider of retirement products and services, both at the workplace and through independent financial professionals, ING U.S.'s goal is to help make it easier for Americans, men and women alike, to grow, protect, and enjoy their savings across all major life stages and financial milestones. ING U.S.'s network of financial professionals includes over 2,500 registered representatives, approximately 400 of whom are female, with ING Financial Partners, a registered investment advisor and broker dealer. All advisors, male and female, offer retirement planning services and seminars to help women better prepare for retirement and also have access to ongoing, women-focused training and workshops to help them understand women's needs and how to better serve women as clients.
A key component of retirement security and comfort for women is securing a dependable income stream in retirement. The need for women in particular to ensure retirement income is magnified by longevity trends. ING Financial Partners provides retirement income materials, tools and education to advisors that help their clients, particularly women, develop a retirement income strategy.
For more information on ING U.S.'s women's study, please visit the ING Retirement Research Institute at http://ing.us/rri/ing-studies/what-about-women .
1 Findings are from an online survey conducted by ORC International during the period of Oct. 5-13, 2011. Respondents were 4,050 adults between the ages of 25 and 69 who are employed full-time with an annual household income of $40,000 or greater. Data was weighted to make the results representative of the U.S. population.
2 "With children" is defined as "with one or more children under the age of 18 living in your home"
3 "Barely Half of U.S. Adults Are Married – A Record Low", Pew Research Center, Dec. 2011
ING U.S. constitutes the U.S.-based retirement, insurance and investment management operations of Dutch-based ING Groep N.V./quotes/zigman/158235/quotes/nls/ing ING +4.52% . In the U.S., the ING family of companies offers a comprehensive array of financial services to retail and institutional clients, including life insurance, retirement plans, mutual funds, managed accounts, alternative investments, institutional investment management, annuities, employee benefits and financial planning. ING holds top-tier rankings in key U.S. markets and serves approximately 15 million customers across the nation. For more information, visit http://ing.us .
SOURCE ING U.S.
Copyright (C) 2012 PR Newswire. All rights reserved
INSURANCE NEWS NET
Another Case for Annuities in 401(K) Plans? Cognitive Impairment
May 04, 2012
The battle to get annuities into 401(k) plans has been hard-fought, and it’s not over yet. Insurance companies see a need to get ‘lifetime income products’ into retirement plans, and have had some success making the case that most plan participants aren’t prepared to create an income plan on their own. Of course, annuities are expensive and complex products. But economist David Laibson pointed to an as-yet-unheard argument for including them in D.C. plans: the decline in cognitive ability as we get older.
During a panel session at BlackRock’s New York headquarters Thursday, Laibson, professor of economics at Harvard and a research associate at the National Bureau of Economic Research, said the prevalence of dementia doubles every five years for North American adults over the age of 60. Nearly 30 percent of adults in their 80s have cognitive impairment without dementia, and 38.8 percent of those over 90 years old have cognitive impairment.
“These individuals should not be making complicated financial decisions—allocating assets, deciding how much to withdraw, dealing with financial advisors calling up trying to sell products with a cold call,” Laibson said. “They need a check that comes every month and automatically deposits into their checking account, and that’s not what they’re getting in the new D.C. world.”
Annuities would reduce the investor’s need to manage a portfolio, something that’s difficult to do in old age, Laibson argues. Yet the system we have in place now for transitioning assets into retirement is the rollover IRA. This vehicle is minimally regulated and much riskier than 401(k) and 403(b) plans that have ERISA protections, he argues.
“The rollover IRA is really the wild west of financial products,” Laibson said.
BlackRock’s annual retirement survey, conducted by the Boston Research Group, found that retirees and pre-retirees are conflicted about annuities. As Laibson pointed out, 77 percent of retirees said they would have chosen to receive a steady stream of income throughout retirement, if given a choice. But when asked if they would prefer having the flexibility to control their assets, or giving control to an investment fund while having the security of guaranteed income during retirement, only 26 percent said they would prefer the latter.
“People are of many minds about annuitization,” Laibson said.
If you frame annuities as guaranteed income for life, investors are all for it, but the minute you frame it as a loss of control, they run for the hills, he said. Laibson believes investors will feel more secure about annuities if they’re framed as a small piece of a very large portfolio. This is less threatening than putting all of their assets into one account with limited liquidity.
Warren Cormier, founder and president of Boston Research Group, believes poor marketing is the primary hurdle to getting individuals into annuities. “I wouldn’t misinterpret it as being a lack of interest, just a lack of how we’re approaching it as an industry.”
At the same time, the annuity industry is going through growing pains, with fewer players, less attractive guarantees and a glut of complex features.
“I think we need a system ultimately where annuities are as easy as auto enrollment, and we’re miles away from that,” Laibson added.
We need regulation that will make that easier to achieve, and plan sponsors that have a greater comfort in using annuity products, he said.
But BlackRock’s survey showed that plan sponsors are on their way to having more annuity options in their retirement plans, although there’s some hesitancy. According to the survey, 11 percent of plan sponsors currently have a guaranteed income option, while 19 percent plan to implement that in the next year.
The biggest hurdle to implementing guaranteed income into the plan is not having the time to conduct due diligence, with 48 percent of plan sponsors responding that way, said Chip Castille, head of BlackRock’s U.S. and Canada defined contribution group. “Insurance-type products in the D.C. market is relatively new.”