Why Smart People Make Dumb and Costly Mistakes With Money

"I can calculate the motion of heavenly bodies, but not the madness of people."

Sir Isaac Newton, Response to the 1720 collapse of the "South Sea Bubble"

Isaac Newton not only invented Calculus and discovered his Three Laws of Motion. Isaac Newton also lost a majority of his wealth in the South Sea Bubble, falling victim to behavioral mistakes investors make. Research indicates that humans are not naturally wired for prudent, long-term investing. And if a genious like Isaac Newton falls victim, what are ordinary investors supposed to do?

In the video accessible through the link below Scott Bosworth of Dimensional Fund Advisors describes common forms of behavioral bias and discusses how these biases influence investment decision making. He also explains how knowledge and discipline can help investors control their instincts for a better investment outcome.

Click here to watch the video. (Approximate run time is 20 minutes.)

Diversification: Disciplinarian of Disciplinarians

Disciplined diversification works when you do and even when you don't want it to. Diversification in effect forces you to sell the thing that has been doing so well in your portfolio and to buy the thing that hasn't. While this makes rational sense, it is emotionally difficult to execute. Think back to the tail end of 2008--were you selling bonds and cash to buy stocks? Most likely you weren't unless your advisor or some sort of automatic trigger did it for you. Carl Richards of www.behaviorgap.com provided a good reminder of how diversification works in a recent NY Times blog post. The diversification he discusses here is more so related to equity asset-class diversification but also touches on the three basic building blocks--equities, bonds, and cash. He doesn't discuss alternative asset classes -- an asset class that doesn't fit neatly into the three basic categories -- being used to further diversification, but that's a detailed topic for another day. ...

What Does $100 Buy You in Your Home State?

A new map released by the Tax Foundation shows exactly how far $100 would go in all 50 states. Using recently released data from the Bureau of Economic Analysis, the Tax Foundation was able to show how the varying prices of goods, housing and income taxes in each state can impact consumers’ purchasing power. Southerners and Midwesterners have a serious edge over those along the East and West Coasts. A hundred bucks goes the furthest in Mississippi, where $100 will buy you what would cost $115.74 in another state that's closer to the national average. The next low-price states are Arkansas, Missouri, and Alabama. Ohio comes in at an encouraging $112.11 Meanwhile, $100 would only be worth $84.60 in the District of Columbia, the priciest state, $85.32 in Hawaii and $86.66 in New York. http://finance.yahoo.com/news/how-much--100-is-worth-in-your-state-152310027.html Click the Map Read More

Medals Per Million

By now, you've seen the final medal count at the London Olympics, and no doubt felt a stirring of national pride. American athletes took home 104 total gold, silver and bronze medals, comfortably ahead of China (87), Russia (82), Great Britain (65), Germany (44), Japan (38), Australia (35), France (34), South Korea (28) and Italy (28). Does that mean that we Americans--so often accused of being a nation of couch potatoes--are the most athletic people in the world? Total medal count is one way to measure, but it may not be the best. Another measurement would take into account the relative number of medals compared to a country's total population: Olympic medals per capita, or (to avoid many decimal places) the number of medals each nation took home per million people in its population. Medals per million gives us a very different ranking. By this measure, citizens of the Caribbean island of Granada are by far the most athletic, with 9.5 Ol...

Kevin Kroskey's Money & Mind

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