America's Not-Ready-for-Primetime Investors

Wednesday, April 27, 2005

America's Not-Ready-for-Primetime Investors

Syndicated columnist Froma Harrop reminds us of one of the key reasons why the GOP's "ownership" approach to Social Security is a road studded with landmines:

Are Americans smart enough to manage their own retirement savings? No, as a matter of fact, they're not .... every week, fresh evidence bubbles up that Americans don't get the basics of ordinary investing.

Rule number one is to diversify. This means spreading money around different investments.

That's exactly what many Enron workers did not do. Rather than invest in a good mix of securities, they put most of their 401(k) money into Enron stock. The stock lost 99 percent of its value in one year, devastating their retirement accounts.

... just three years later, the same thing happened at Marsh & McLennan, the financial-services company. Thousands of workers had filled their 401(k) retirement accounts with Marsh & McLennan stock. A scandal sent the shares into a tailspin. What makes this tale extra sobering is that the Marsh & McLennan employees worked in finance. They were more sophisticated about investing than the average Joe and Jane.

People still haven't learned. A Hewitt Associates survey of 500 companies looked at workers who keep their employer's stock in their 401(k)s. It found that an average 41 percent of those accounts were invested in that one stock.

... The federal government has been a model for giving workers control over their retirement accounts. Too bad federal employees haven't been model investors.

After stocks soared in the '90s, many federal workers did exactly what Thaler predicted they would do. They took money out of safe-but-dull Treasury bonds and put them in an S&P 500-stock index fund. The Wall Street bubble burst, and their retirement accounts lost big.

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