Tightwads and Spendthrifts

If you’re a big saver and your significant other is a big spender (or vice versa), you might be surprised to learn that might have been the very trait that attracted you to them in the first place.  According to a paper written by Scott Rick and Deborah Small of the Wharton School of Finance and Eli Finkel of Northwestern University:

Surveys of married adults suggest that opposites attract when it comes to emotional reactions toward spending.

Interestingly, it’s been found that most single men and women state that they would actually prefer a mate with similar spending habits.  To read the full article, click here.

Inflation, Living Standards, and Return

Does your retirement plan take inflation into account?  Since Vietnam, inflation has averaged 4.6% per year.  This may not sound like much, but since 1969 the purchasing power of a dollar has dropped by more than eighty percent. 

 

Moreover, an interesting strand of economic research suggests that a retirement planner should also take into account “keeping up with the Joneses” – that is, spending even more in retirement to keep improving your lifestyle along with everyone else.  The historical rate of inflation, alone, understates the challenge investors face in funding a comfortable retirement. 

 

If you’re interested in a technical article that explains the details for you, read on…

Should I Invest in International Stocks?

International stocks are an important component of a well-diversified stock portfolio.  Based on world market capitalization, sixty percent of a U.S. investor’s stock portfolio might be allocated to international stocks.  A number of other considerations argue for reducing that exposure, however. 

While no fail-safe formula defines the best combination of U.S. and international stocks, the available evidence suggests that the traditional portfolio of 70% U.S. stocks and 30% international stocks has historically offered enhanced long-term returns with reduced risk, and probably is at least a well-reasoned starting point for most U.S. stock portfolios. To learn why, click here.

Do Democracies Last Only 200 Years?

By Thomas L. Posey, CFP, J.D., AAMS

 One sometimes hears – with ominous overtones for the United States – that democracies last only two hundred years.  Is this limit on the life of a democracy a fact, or an urban legend?

 Though often attributed to British lawyer Alexander Tyler, the origin of the saying is unknown.  History offers little support for it, however. 

 Advocates of the 200-year limit might point out that Athenian democracy lasted about 180 years, from 500 BC to 322 BC.  Nevertheless, other examples are scarce.  Roman democracy, the other obvious example of a representative democracy from the ancient world, lasted from 509-27 BC, or more than 500 years – far in excess of the supposed limit.[1] 

 A less well-known ancient example of a democracy of Native Americans also contradicts the limit.  The democracy founded by the Iroquois spanned several hundred years.

 British democracy can be traced to the English Bill of Rights (1679), and before that to Magna Carta in 1215 – in either case far more than two hundred years ago. 

 The American (1776) and French Revolutions (1793), 233 and 216 years ago, gave birth to two democracies more than two hundred years ago…and counting.  Obviously no clear evidence foretells the imminent demise of the American and French democracies, and already their longevity is stretching the supposed 200-year rule to the breaking point.

Recent history provides no contradictions to the 200-year rule because of course fewer than two hundred years have elapsed. To illustrate, the Japanese and German democracies, along with a number of other modern democracies, have existed only since World War II b just over 60 years. Thus, not enough time has passed for these democracies to test the 200-year limit.

In summary, history offers little evidence to support the contention that democracies must fail after two hundred years. Perhaps this urban legend had its roots in the bald speculations of doomsayers who had already concluded that the U.S. is on the decline, who then noticed that the U.S. is about 200 years old, and who figured that the imagined 200-year “rule” would provide convenient support for their own claims that the demise of the U.S. is closer than most think.

[1] Some imagine the 207-year Pax Romana, from 27 BC to 180 AD, was an idyllic period of democracy; however, it began with the accession of emperor Augustus Caesar and ended with the death of emperor Marcus Aurelius, and more resembles a dictatorship than a democracy.

Do Investors Understand Risk?

In this hour-long interview, Nassim Taleb, originator of the Black Swan hypothesis, argues that investors give too little weight to the risk of statistical “outliers.”  He says that the odds that unlikely events will occur are greater, and their impact is greater, than investors generally perceive.  Daniel Kahneman, well-known authority on behavioral finance, agrees with Taleb’s thesis but argues that the human need for certainty and security will prevent people from perceiving risk differently.  This conversation on perceived risk is especially interesting given the backdrop of the recent upheavals in global financial markets. 

A personal note:  Once I got past the first ten minutes, I found the remainder of this hour-long interview intriguing.  The video offers, from an odd quarter, a point of view supporting my typical financial planning advice to avoid excessive portfolio risk and avoid or pay off most indebtedness.  It’s worth a listen if you have the time.  Click here for the video.

The World at a Glance

United States companies now account for less than half of world stocks.  See at a glance all the investment opportunities in the world.

A Whole Lotto Luck

Millions of Australians queued up recently for a chance to scoop the nation’s biggest jackpot lottery draw.  As a demonstration of hope over experience, it carried uncanny echoes of how many people approach investing.  Click here to read the full article.

Home Bias

Do you have most of your stock portfolio in US stocks?  If so, you’re not alone.  Investors worldwide tend to concentrate their investments at home – even when “home” is a very small place.  To illustrate, the average Canadian has about 70% of his investments in stocks of Canadian companies, even though Canadian companies make up less than 3% of world market value.  Does concentrating 70% of your investments in 3% of the market make sense?  No, but the average American shouldn’t be too smug.  Most Americans’ portfolios reflect a similar home bias.

Can I Open a Section 529 Account in Anticipation of My Future Grandchild?

No…but yes.  If you’re about to be a grandparent (or parent), check out this article on opening an Section 529 account to fund the child’s college education.

Money Can Buy Happiness…

Researchers have concluded that you can buy happiness after all – when you spend money on others.