Morningstar Advisor - April/May 2013 - (Page 80)
Phillips Curve
Our Social Blind Spot
By Don Phillips
A few years ago, I watched an American
television journalist sigh after a colleague
reported on a financial story and utter words
to the effect that she could never understand
finance—interest rates and yields and
inverse relationships, she opined, were simply
too confusing for her. It was intended to be,
and was taken by her colleagues as, an
amusing foible. For in American culture, it’s
considered quaint and even mildly amusing,
and certainly not a matter of shame or
potential embarrassment, that a mature adult
should turn a deaf ear to financial issues.
Why do we tolerate investment ignorance
when we frown upon inattention to
other matters of adult life? If this same host
had professed an inability to understand
politics—how can one possibly grasp
three chambers of government and two parties
and the electoral college?—she would have
been soundly chastised and possibly
disciplined by her employer. Similarly, if an
adult declared football as simply too difficult to
grasp, what with its three-four defenses, nickel
packages, and blitzes, the person would be
thought deficient and possibly ostracized from
some social circles.
We regularly master subjects that are every bit
as difficult as investing, for failure to do
so would be seen as a personal, professional,
or even a moral shortcoming. Why of all things
isn’t investment literacy on this list of
expected competencies of American adults?
Surely, an ability to save intelligently
for the future, to secure better protections
and opportunities for oneself and one’s loved
ones should be near the top of the list of
expected adult competencies. Yet, we find in
80 Morningstar Advisor April/May 2013
practice that it is not, and this failure
of expectation is at the root of our nation’s
inability to invest with discipline and
competence, a shortcoming that limits our
personal and national potential.
I say our national potential because our
politicians either suffer from or exploit the
same blind spots that plagued this TV journalist.
The recent debate surrounding taxes contained
references to tax preferences for capital
gains or dividends as tax breaks for the elite,
despite the clear evidence that dividend
and capital gains taxes are progressive, rising
from 0% to 15% to 20%, and now to 23.8%.
Articles about rising incomes for the 1%
declared that group’s unfair advantage because
they participated in the stock market’s strength
while the middle class supposedly could
not. Why do we depict investing as something
only the elite can do, rather than as an
expectation of all adults? I started investing
with paper route money as a teenager and
saved money for investment ever since my first
Morningstar paycheck. We should not excuse
a failure to set funds aside for the future as an
expected outcome for the middle class.
Rather, it is, in many cases, a simple human
preference for the immediate gratification
of spending over the deferred benefit of saving.
Of course, politicians have often been the
worst practitioners of a live-for-today
philosophy. Why worry about pension promises
that won’t come due for decades if they
can get you re-elected today? In my hometown
of Chicago, we’ve disgracefully sold off
decades’ worth of parking revenues for a
pittance of their market value in order to create
what our former mayor declared to be a
“rainy day” fund. When asked two years after
the foolhardy deal why the money had
already been spent, the mayor responded, “It
was raining.” Selling long-term assets to meet
short-term obligations is a disastrous fiscal
course. Sadly, it’s the role model too many of
our politicians create for us. While the citizens
struggle with the aftermath of these deals,
the politicians move on to lucrative positions
on corporate boards or at law firms to
exploit their government contacts. One can only
hope that they’re not spreading their financial
wisdom to these new entities.
Ultimately, we’re responsible for our own
behavior and the consequences of the damage
the officials we elect do by incurring massive
deficits and making dumb financial trade-offs.
Our own tolerance of financial illiteracy
makes us vulnerable both as individuals and as
a society. The mathematics of investing isn’t
that difficult. We owe it to ourselves and
our communities to get smarter about investing,
to stop thinking of finance as too daunting,
and to stop letting politicians exploit
our collective naiveté. A working knowledge
of investment fundamentals shouldn’t be
exceptional; it should be the expectation of all
adults. Failure to do so leaves us vulnerable
to the worst aspects of Wall Street, to
short-sighted politicians, and to our own base
instincts. It’s tempting to live the carefree life
of the grasshopper, to cherish immediate
gratification and not plan for tomorrow. But it’s
the ants who build a strong society because
they prepare for the future by consuming less
than they have today. K
Don Phillips is president of Morningstar’s Investment
Research division.
Table of Contents for the Digital Edition of Morningstar Advisor - April/May 2013
Morningstar Advisor - April/May 2013
Contents
Contributors
Letter From the Editor
The Pursuit of Happiness and Financial Advice
What Strategies Do You Use to Control Risk?
Driven to Succeed for Clients and Family
How to Assess a Portfolio’s Bond Risk
Luck, Skill, and Investing
Investments á la Carte
Investment Briefs
Investing’s No- Brainers Have Costs
A Defensive Ride
Risk On/On Risk
The Risk of Being Overconfident
Year of Living Dangerously
The Risk-Parity Approach
A Guide to Mutual Funds Running Risk-Parity Strategies
What Moats Tell Us About Risk
Risk’s Wake-Up Call
Seeing Is Believing
Why Investors Lag the Returns of Their Funds
Liquidity Signals
Pump Them Up
Golden Oldies Keep on Truckin’
Our Favorite Mutual Funds
50 Most-Popular Equity ETFs
Undervalued Stocks With Wide Moats
Our Social Blind Spot
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