Monday, May 30, 2011


When I started putting money into a 401K plan, the conventional formula assumed that a conservative investment mix would deliver about 8% per year.


This was back when real estate values were expected to never retreat, the stock market was presumed an almost sure bet, and bonds were suggested as a kind of seasoning to the recipe, basically a head-nod to the faint possibility of risk, a demonstration of being a responsible investor rather than a speculator pinning one's star to the flighty fancies of the stock market.

According to US News, the average 401K account balance is now back to about where it was in 2007, before the latest financial unpleasantness. That's about $70,000, up about $20 K from the low in 2008. Of course, only a few people had the foresight to bet against the housing bubble and subprime mortgage gold rush. The breadth and depth of the bailouts required to keep the world's economy afloat are pretty strong evidence that most investors failed to see the end coming.

Efficient market theories assume that the price of an asset always reflects the perfect balance of valuations by informed investors acting out of rational self interest. Market behaviorists have recently shown that most investors don't qualify as perfectly rational or informed, and this is certainly even more true among the amateurs who make up the bulk of 401K owners. Since most actively managed funds fail to beat the market, even the experts get it wrong more often than right.

Recently, Steve Levitt and Thomas Miles at the University of Chicago demonstrated that poker is a game of skill rather than strictly one of chance. They showed that high performing poker players continue to perform well from year to year, while mutual fund managers' successes and failures are random.

It's ironic that online poker is outlawed in the US because it's considered to be gambling, while investments in mutual funds are a mandatory part of retirement planning.