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It was Richard Thaler's Misbehaving: The Making of Behavioral Economics book that finally broke through my thick, anxiety ridden skull and convinced me to stop

It was Richard Thaler's Misbehaving: The Making of Behavioral Economics book that finally broke through my thick, anxiety ridden skull and convinced me to stop reading economic news everyday and just forget the the retirement accounts existed. If I'd read that book earlier, I'd be up 3X on my positions.

ChrisMarshallNY 2y ago
I haven't touched my 401(K) in over 30 years. It's done 9-20% per year. It's not super aggressive, but will take a hit, on really bad markets (the only year it actually lost money, was 2020 -and it has completely made up for that. It even made some money in 2008). I ignore the Fidelity calls. Every time a new broker rotates in, they try to get me to move my money around.
- benrapscallion 2y ago
  Is it invested in an index fund?
  - ChrisMarshallNY 2y ago
    Yes. I contributed 50% to a bond fund, as well, but that is like, 10% of the total, nowadays.
    - deleted 2y ago
      [deleted]
    - lkdfjlkdfjlg 2y ago
      > I contributed 50% to a bond fund, as well, but that is like, 10% of the total, nowadays. That's one of the ridiculous aspects of fixed-percentage allocations: by constructions those allocations tell you that you should get rid of the things that are making you the most money, and put it into the things which are underperforming instead. (I get that you didn't do that, I'm just got reminded of it.)
      - carbotaniuman 2y ago
        The tradeoff is you lock some of those gains down in safer assets. Probably the wrong choice for retirement earlier on, but if you need money during an economic crisis, say you got laid off, then that might change how it's viewed.
        mattmaroon 2y ago
        That’s very true, but he’s had the account for 30 years and assuming that means he started it young, 50% in bonds is borderline insane. It’s a lot more likely to cost you a large amount in retirement than bail you out in your 30’s.
        ChrisMarshallNY 2y ago
        Well, what’s done is done. I was planning to bail, back in my 30’s, but changed my mind, and stayed for almost 27 years. It still makes more than I spend, but we’ll see what the future brings.
        mattmaroon 2y ago
        That’s the great thing about saving, even if you do it suboptimally, it still is a lot better than the opposite. And in hindsight it’s almost always suboptimal.
        ghaff 2y ago
        You can do insanely stupid things of course. But saving in some remotely rational and diversified way is better than not saving at all even if some bets turn out to be better than others.
        Majromax 2y ago
        Applying optimal portfolio theory to the long history of market returns suggests that the most risk-efficient allocation is something like 60% stocks and 40% bonds. The diversification reduces volatility faster than it reduces the overall return, so equity-like returns can be regained by using leverage on the portfolio. Following this advice today is tricky thanks to the persistent yield inversion: you obviously can't improve returns by using short-term borrowing at 5% to invest in long-term bonds at 4%.
    - throwaway2037 2y ago
      Bond funds are weird to me because you cannot hold to maturity to realize yield-to-maturity. The only point to them is to get coupon payments. Is your bond fund total return or, if not, what do you do with the coupon payments? To me, it just seems better to buy outright mix of 2yr and 10yr US treasuries and always hold to maturity.
      - chii 2y ago
        > just seems better to buy outright which is fine, but you're just adding administrative burden on yourself. The bond fund is doing exactly what you're trying to achieve, except that they reinvest the bond capital back into new bonds when they mature. You get the coupon payment as income, and you sell the bond fund when you want capital back. The price of the bond fund is a reflection of the value of the bond at market prices - exactly as if you would yourself, if you held the bond directly, and wanted to sell before maturity. You might eek out a tiny bit of efficiency due to lack of fund fees you pay, if you held bonds yourself - but then the administrative burden you have to do yourself is going to cost just the same imho (via time taken for example).
        bulletsvshumans 2y ago
        Everything you mention is correct, I just wanted to add that holding bonds directly makes sense in the case when you have a date in mind for when you will need the invested money. So for instance if you plan to buy a car in 2 years buying bonds that mature in 2 years has the nice property of being worth a guaranteed amount of money exactly at the point you need those savings. There are etf equivalents known as “bullet shares” but these have an expense ratio that isn’t incurred with owning bonds directly.
        throwaway2037 2y ago
        Hat tip on bullet maturity ETFs. I never heard of this before your post. Ref: https://www.etf.com/topics/bullet-maturity https://www.etf.com/topics/bullet-maturity
    - georgeecollins 2y ago
      It's silly to quibble with your great results (good job!) but its a good idea to re balance your portfolio between stocks and bonds every quarter or every year at a fixed percentage. (60/ 40, 70 / 30, 80/ 20 ratio is risk) Portfolio re balancing, like ETFs is one of those things that has been shown to work over time in many studies. ETFs re balance. The stock / bond ratio was an early form of "automatic" investing.
- throwaway2037 2y ago
  I don't work for Interactive Brokers, but I do periodically shill for them here on HN! Their market access diversity and rock bottom fees are very hard to beat. It should be possible to transfer a 401k in-whole with zero tax consequences nor booked trades.
  - TacticalCoder 2y ago
    Yeah... At times I just take funds I like, read what they re actually made of, and replicate their holdings in IBKR. This way I dodge the fund's 0.5% annual fees and performance fees. 39 cents per transaction is hard to beat. The lump sum of cash on the sideline gets you 4.83% on IBKR (as long you have $100K+ on he sidelines). Cash secured puts you sell bring you yield on the USDs securing the put. Financial reports they make are top Noth and entirely configurable.
- usaar333 2y ago
  > the only year it actually lost money, was 2020 -and it has completely made up for that. It even made some money in 2008 How did you manage to not lose money in 2022? Almost every asset class was negative then.
  - pc86 2y ago
    Most people just look at the balance and forget (in the self-preservation, "I want to be right" kind of forgetting) that they contribution $20k+ that year so unless you've got a multi-million dollar 401(k) or the market was down 10%+ across the board you're very likely to see more on December 31st than was there January 1st regardless.
    - ghaff 2y ago
      I'm not sure that's quite fair. Unless it were 2001 or 2008 people look at their balances and see they're generally up unless they made some big gamble and at least unconsciously conclude they probably did as well as they reasonably could. But that may be what you're saying. Worrying about a percent here or there probably isn't worth it for most people.
      - pc86 2y ago
        We're saying the same things, I just meant you could actually lose a lot of money but see your balance go up, especially with smaller portfolios. As your portfolio gets bigger it's less likely to happen because eventually a single-digit loss over the course of a year might be enough to wipe out more than the max contribution.
        ghaff 2y ago
        Yes. Even if your overall balance is going up, it makes sense to keep your eye on doggy investments. I really cleaned shop a couple years ago and I'm glad I did.
dralley 2y ago
I've done well (39% annual returns) investing in 2-3 individual stocks in addition to index funds for the rest of my investments. More than that would be IMO too much to pay attention to. Admittedly my choices for stocks are a bit on the high-risk side, but it's worked out well so far. Picking up lots of AMD in 2017, and Rivian 6 weeks ago, seems to have been decent calls.
- zeroonetwothree 2y ago
  Sorry but I never believe these online claims given with no evidence about ridiculously high returns. It’s not to say you are lying but it’s easy to miscalculate these things.
  - ghaff 2y ago
    Yeah, I've done quite well with a few specific (tech) stocks that were reasonable picks (and some modest bets that were simply wrong). (Which I mostly funneled into a charitable trust that pays an annuity.) But I certainly wouldn't put all my money or even most of it on such a bet. Even if I think I have a better insight than John Q. Public into something, there are so many variables.
  - BeetleB 2y ago
    He's talking about 7 years. Lots of people do very very well on short timeframes. They usually balance out in the long run.
    - dralley 2y ago
      I bought into AMD stock when it was $10 per share, it's now $180, yes it's a bit lucky but I'm not bullshitting. It seemed quite logical to me at the time that they would do well. This was right as Intel was being savaged by Meltdown and the performance hits of the mitigations and Zen 1 was successful.
      - wingworks 2y ago
        But will you sell in time for all that growth to not be eroded away? Tech has been doing really well last few years, but it won't last forever looking at history. So when do you sell, and what do you buy when you sell. This is why people opt for low fee index funds, like a total stock market fund. It'll always be in the right companies.
ghaff 2y ago
Great read. I actually recommend it over Nudge. I had him as a professor at Cornell for a couple courses before "behavioral economics" was a term.
EVa5I7bHFq9mnYK 2y ago
It depends. I had a pension plan that grew x2 in 17 years (don't know what they invested into). My own investments grew much faster than S&P though.
- thevillagechief 2y ago
  I should have clarified, this is a 401K, not a pension plan. So it's just passive index funds. I don't even think of pensions as a thing anymore.
- throwaway2037 2y ago
  Is that pension plan defined benefit or defined contribution?
  - EVa5I7bHFq9mnYK 2y ago
    Not sure, it was supposed to grow until I turned 67, at which point it was to be converted to a fixed annuity until my death. But I liquidated it early.
embwbam 2y ago
What about the book made the difference? I'm 100% convinced that it's better to do as you say, and forget about the accounts, and also unable to resist the temptation to check them every day. I'm constantly tempted to make changes.
- stavros 2y ago
  This might help: https://www.thesummarist.net/summary/misbehaving/ https://www.thesummarist.net/summary/misbehaving/
- thevillagechief 2y ago
  The full analysis is too long to go on here, but on the chapter "Narrow Framing on the Upper East Side has this conclusion: "The implication of our analysis is that the equity premium - or the required rate of return on stocks - is so high because investors look at their portfolios too often. Whenever anyone asks me for investment advice, I tell them to buy a diversified portfolio heavily tilted toward stocks, especially if they are young, and then scrupulously avoid reading anything in the newspaper aside from the sports section. Crossword puzzles are acceptable, but watching cable financial news networks is strictly forbidden." Of course there's the usual caveat about rebalancing as you approach retirement, basically the target date strategy. Really, the book gives great context into just how irrational we humans are. It has lots of studies, examples and anecdotes on behavioral economics. It was the book that actually helped me make sense of sunken cost fallacy.

ChrisMarshallNY 2y ago

I haven't touched my 401(K) in over 30 years. It's done 9-20% per year. It's not super aggressive, but will take a hit, on really bad markets (the only year it actually lost money, was 2020 -and it has completely made up for that. It even made some money in 2008). I ignore the Fidelity calls. Every time a new broker rotates in, they try to get me to move my money around.

benrapscallion 2y ago
Is it invested in an index fund?
- ChrisMarshallNY 2y ago
  Yes. I contributed 50% to a bond fund, as well, but that is like, 10% of the total, nowadays.
  - deleted 2y ago
    [deleted]
  - lkdfjlkdfjlg 2y ago
    > I contributed 50% to a bond fund, as well, but that is like, 10% of the total, nowadays. That's one of the ridiculous aspects of fixed-percentage allocations: by constructions those allocations tell you that you should get rid of the things that are making you the most money, and put it into the things which are underperforming instead. (I get that you didn't do that, I'm just got reminded of it.)
    - carbotaniuman 2y ago
      The tradeoff is you lock some of those gains down in safer assets. Probably the wrong choice for retirement earlier on, but if you need money during an economic crisis, say you got laid off, then that might change how it's viewed.
      - mattmaroon 2y ago
        That’s very true, but he’s had the account for 30 years and assuming that means he started it young, 50% in bonds is borderline insane. It’s a lot more likely to cost you a large amount in retirement than bail you out in your 30’s.
        ChrisMarshallNY 2y ago
        Well, what’s done is done. I was planning to bail, back in my 30’s, but changed my mind, and stayed for almost 27 years. It still makes more than I spend, but we’ll see what the future brings.
        mattmaroon 2y ago
        That’s the great thing about saving, even if you do it suboptimally, it still is a lot better than the opposite. And in hindsight it’s almost always suboptimal.
        ghaff 2y ago
        You can do insanely stupid things of course. But saving in some remotely rational and diversified way is better than not saving at all even if some bets turn out to be better than others.
        Majromax 2y ago
        Applying optimal portfolio theory to the long history of market returns suggests that the most risk-efficient allocation is something like 60% stocks and 40% bonds. The diversification reduces volatility faster than it reduces the overall return, so equity-like returns can be regained by using leverage on the portfolio. Following this advice today is tricky thanks to the persistent yield inversion: you obviously can't improve returns by using short-term borrowing at 5% to invest in long-term bonds at 4%.
  - throwaway2037 2y ago
    Bond funds are weird to me because you cannot hold to maturity to realize yield-to-maturity. The only point to them is to get coupon payments. Is your bond fund total return or, if not, what do you do with the coupon payments? To me, it just seems better to buy outright mix of 2yr and 10yr US treasuries and always hold to maturity.
    - chii 2y ago
      > just seems better to buy outright which is fine, but you're just adding administrative burden on yourself. The bond fund is doing exactly what you're trying to achieve, except that they reinvest the bond capital back into new bonds when they mature. You get the coupon payment as income, and you sell the bond fund when you want capital back. The price of the bond fund is a reflection of the value of the bond at market prices - exactly as if you would yourself, if you held the bond directly, and wanted to sell before maturity. You might eek out a tiny bit of efficiency due to lack of fund fees you pay, if you held bonds yourself - but then the administrative burden you have to do yourself is going to cost just the same imho (via time taken for example).
      - bulletsvshumans 2y ago
        Everything you mention is correct, I just wanted to add that holding bonds directly makes sense in the case when you have a date in mind for when you will need the invested money. So for instance if you plan to buy a car in 2 years buying bonds that mature in 2 years has the nice property of being worth a guaranteed amount of money exactly at the point you need those savings. There are etf equivalents known as “bullet shares” but these have an expense ratio that isn’t incurred with owning bonds directly.
        throwaway2037 2y ago
        Hat tip on bullet maturity ETFs. I never heard of this before your post. Ref: https://www.etf.com/topics/bullet-maturity https://www.etf.com/topics/bullet-maturity
  - georgeecollins 2y ago
    It's silly to quibble with your great results (good job!) but its a good idea to re balance your portfolio between stocks and bonds every quarter or every year at a fixed percentage. (60/ 40, 70 / 30, 80/ 20 ratio is risk) Portfolio re balancing, like ETFs is one of those things that has been shown to work over time in many studies. ETFs re balance. The stock / bond ratio was an early form of "automatic" investing.
throwaway2037 2y ago
I don't work for Interactive Brokers, but I do periodically shill for them here on HN! Their market access diversity and rock bottom fees are very hard to beat. It should be possible to transfer a 401k in-whole with zero tax consequences nor booked trades.
- TacticalCoder 2y ago
  Yeah... At times I just take funds I like, read what they re actually made of, and replicate their holdings in IBKR. This way I dodge the fund's 0.5% annual fees and performance fees. 39 cents per transaction is hard to beat. The lump sum of cash on the sideline gets you 4.83% on IBKR (as long you have $100K+ on he sidelines). Cash secured puts you sell bring you yield on the USDs securing the put. Financial reports they make are top Noth and entirely configurable.
usaar333 2y ago
> the only year it actually lost money, was 2020 -and it has completely made up for that. It even made some money in 2008 How did you manage to not lose money in 2022? Almost every asset class was negative then.
- pc86 2y ago
  Most people just look at the balance and forget (in the self-preservation, "I want to be right" kind of forgetting) that they contribution $20k+ that year so unless you've got a multi-million dollar 401(k) or the market was down 10%+ across the board you're very likely to see more on December 31st than was there January 1st regardless.
  - ghaff 2y ago
    I'm not sure that's quite fair. Unless it were 2001 or 2008 people look at their balances and see they're generally up unless they made some big gamble and at least unconsciously conclude they probably did as well as they reasonably could. But that may be what you're saying. Worrying about a percent here or there probably isn't worth it for most people.
    - pc86 2y ago
      We're saying the same things, I just meant you could actually lose a lot of money but see your balance go up, especially with smaller portfolios. As your portfolio gets bigger it's less likely to happen because eventually a single-digit loss over the course of a year might be enough to wipe out more than the max contribution.
      - ghaff 2y ago
        Yes. Even if your overall balance is going up, it makes sense to keep your eye on doggy investments. I really cleaned shop a couple years ago and I'm glad I did.

dralley 2y ago

I've done well (39% annual returns) investing in 2-3 individual stocks in addition to index funds for the rest of my investments. More than that would be IMO too much to pay attention to. Admittedly my choices for stocks are a bit on the high-risk side, but it's worked out well so far. Picking up lots of AMD in 2017, and Rivian 6 weeks ago, seems to have been decent calls.

zeroonetwothree 2y ago
Sorry but I never believe these online claims given with no evidence about ridiculously high returns. It’s not to say you are lying but it’s easy to miscalculate these things.
- ghaff 2y ago
  Yeah, I've done quite well with a few specific (tech) stocks that were reasonable picks (and some modest bets that were simply wrong). (Which I mostly funneled into a charitable trust that pays an annuity.) But I certainly wouldn't put all my money or even most of it on such a bet. Even if I think I have a better insight than John Q. Public into something, there are so many variables.
- BeetleB 2y ago
  He's talking about 7 years. Lots of people do very very well on short timeframes. They usually balance out in the long run.
  - dralley 2y ago
    I bought into AMD stock when it was $10 per share, it's now $180, yes it's a bit lucky but I'm not bullshitting. It seemed quite logical to me at the time that they would do well. This was right as Intel was being savaged by Meltdown and the performance hits of the mitigations and Zen 1 was successful.
    - wingworks 2y ago
      But will you sell in time for all that growth to not be eroded away? Tech has been doing really well last few years, but it won't last forever looking at history. So when do you sell, and what do you buy when you sell. This is why people opt for low fee index funds, like a total stock market fund. It'll always be in the right companies.

ghaff 2y ago

Great read. I actually recommend it over Nudge. I had him as a professor at Cornell for a couple courses before "behavioral economics" was a term.

EVa5I7bHFq9mnYK 2y ago

It depends. I had a pension plan that grew x2 in 17 years (don't know what they invested into). My own investments grew much faster than S&P though.

thevillagechief 2y ago
I should have clarified, this is a 401K, not a pension plan. So it's just passive index funds. I don't even think of pensions as a thing anymore.
throwaway2037 2y ago
Is that pension plan defined benefit or defined contribution?
- EVa5I7bHFq9mnYK 2y ago
  Not sure, it was supposed to grow until I turned 67, at which point it was to be converted to a fixed annuity until my death. But I liquidated it early.

embwbam 2y ago

What about the book made the difference? I'm 100% convinced that it's better to do as you say, and forget about the accounts, and also unable to resist the temptation to check them every day. I'm constantly tempted to make changes.

stavros 2y ago
This might help: https://www.thesummarist.net/summary/misbehaving/ https://www.thesummarist.net/summary/misbehaving/
thevillagechief 2y ago
The full analysis is too long to go on here, but on the chapter "Narrow Framing on the Upper East Side has this conclusion: "The implication of our analysis is that the equity premium - or the required rate of return on stocks - is so high because investors look at their portfolios too often. Whenever anyone asks me for investment advice, I tell them to buy a diversified portfolio heavily tilted toward stocks, especially if they are young, and then scrupulously avoid reading anything in the newspaper aside from the sports section. Crossword puzzles are acceptable, but watching cable financial news networks is strictly forbidden." Of course there's the usual caveat about rebalancing as you approach retirement, basically the target date strategy. Really, the book gives great context into just how irrational we humans are. It has lots of studies, examples and anecdotes on behavioral economics. It was the book that actually helped me make sense of sunken cost fallacy.