Why entrepreneurs are often bad investors

Here's a recent article by Larry Swedroe that highlights why entrepreneurs and other successful businesspeople frequently make bad investors.

The very success of the active investors creates a behavioral problem. Because of their successes, they’re not only confident of their skills, but they’re also confident in their ability to tolerate, manage and control risks. These behavioral traits can lead to them to the mistake of failing to consider that the strategy to get rich — work hard and take big risks, typically by owning a business — is entirely different than the strategy to stay rich — minimize risks, diversify the risks one takes and don’t spend too much. The former is about wealthaccumulation, the latter about wealth preservation. Those who have already achieved sufficient wealth to support a quality lifestyle can either focus on the preservation of capital by having a low allocation to risky assets like equities, or they can try to accumulate even more wealth by having a large allocation to risky assets.

Read the whole article, How you earned your money plays a big role in your investing mindset.

Four ways to boost Social Security benefits

Elaine Floyd of Savvy Social Security offers these tips to boost Social Security benefits:
  1. Work longer, earn more. Your earnings record for Social Security continues to be updated as long as you work and pay into Social Security. If you keep working at a relatively high salary, it can cause one of your lower-earning years to drop off the 35-year earnings record and serve to boost your primary insurance amount (PIA). This advice is especially important for people who do not have 35 years of high earnings, such as women who have stayed home with their children. It even applies to high-earners in their 50s and 60s; although the earnings in their early years are indexed for inflation, the indexed amount is likely lower than their current salary. For example, after indexing, the maximum wage base of $10,800 in 1973 counts as about $55,000. So a person who already has 35 years of maximum earnings can continue to improve their earnings record by replacing one or more of those early indexed years with today's higher earnings.

  2. Delay applying for benefits. In today's low-return environment, those 8% annual delayed credits that an unclaimed benefit earns between the ages of 66 and 70 end up being extremely valuable. Most people consider their "breakeven age," or the age at which the cumulative total under the later-claiming scenario catches up to the earlier-claiming scenario. But this usually leads to earlier claiming behavior because people don't want to start out "behind." A better way to look at it is to consider the relative income in your old age, when you are 85 or 90. For example, the age-85 benefit for a maximum earner born in 1946 will be $3,320 if he applied at 62 vs. $5,844 if he applies at age 70, assuming 2.8% annual COLAs. The bigger risk for baby boomers is not dying too soon and leaving money on the table; it's living too long and having insufficient income in your later years when you really need it.

  3. Coordinate spousal benefits. There is a lot married couples can do to maximize their joint Social Security income, but they have to pay attention to the rules. For example, a high-earning husband can collect a spousal benefit off his wife's record between the ages of 66 and 70 while his own benefit earns delayed credits. Alicia Munnell from the Center for Retirement Research at Boston College calls this the "claim now, claim more later" strategy. But as our advisors have put it into practice with their clients, we are seeing that knowledge of the rules is essential. In order for it to work, three things must happen: 1) the wife must have applied for benefit on her own record (and if she is under full retirement age this may not be the best move); 2) the husband cannot do this before he is full retirement age; and 3) when he goes to his SSA office he must tell them he wants to restrict his application to his spousal benefit (otherwise they will pay him his own benefit and all delayed credits will stop). There are too many spousal strategies to talk about here, but the main point is that you have to take into account each spouse's age and PIA and you have to know the rules in order to implement them properly.

  4. Maximize survivor benefits. One huge benefit of Social Security is that if one spouse dies, the other spouse may jump up to that spouse's benefit if it is higher. So if Jack dies while receiving a benefit of $2,200 a month, Jill can trade in her $1,100 benefit for Jack's $2,200; this becomes her new survivor benefit. The main way to maximize the survivor benefit is to have the high earner delay benefits to age 70. This will maximize their joint income while both spouses are alive, and it will maximize the surviving spouse's income after one spouse dies. See the example above in #2, if Jack dies at age 85. Would he rather leave Jill a monthly benefit of $3,320 or $5,844? He can ensure the higher survivor benefit for her by applying for his own benefit at 70. One important thing we've found is that applying before full retirement age is the worst thing a high earner can do, even if he is not expected to live very long. Let's say Jack applies for Social Security at 62 and dies after receiving one check. In this case Jill's survivor benefit will be based on Jack's age-62 benefit. But if he dies without having applied for Social Security, her survivor benefit would be based on his age-66 benefit, which would be about 25% higher. It seems counterintuitive to advise a terminal patient age 62-66 not to file for Social Security (other than disability, where appropriate) so he can collect as much as possible while he's alive, but holding off will increase the spouse's survivor benefit.

Cognitive Reflection Test (CRT): How do you score?

Shane Frederick of Yale University created the Cognitive Reflection Test (CRT) which measures a person's ability to effectively use his cognitive reasoning ability to override, when necessary, his brain's reflexive (and usually impulsive) decision making center.

People who miss one or more of the questions are more susceptible to the many psychological biases that frequently plague investors.

If you miss any of these questions, take it as a signal to slow down and give more careful consideration to your investment decisions and make an effort to be consciously aware of human bias tendencies which can distort your reasoning and decision-making ability.

  • A bat and a ball cost $1.10 in total. The bat costs $1.00 more than the ball.
    How much does the ball cost?
  • If it takes 5 machines 5 minutes to make 5 widgets, how long would it take
    100 machines to make 100 widgets?
  • In a lake, there is a patch of lily pads. Every day, the patch doubles in size.
    If it takes 48 days for the patch to cover the entire lake, how long would it
    take for the patch to cover half of the lake?

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>>>>>    $.05, 5 minutes, 47 days