Investing for Dummies

Investing for Dummies
When it comes to managing money, the L.A. Times says were all dummies. The next step in the logic is for Social Security to stay the same to protect us from ourselves.

By Amy Menefee
May 12, 2005

     The sub-headline on Peter Gosselins May 11, 2005, Los Angeles Times article summed up its prevailing position. It read, Nobel winners and top academics fumble the sorts of decisions Bushs Social Security overhaul plan would ask average Americans to make. Gosselin interviewed Nobel prize-winning economists who revealed their own poor investment decisions, and he presented that as evidence that personal accounts would be terrible for Social Security. His reasoning was that if economists cant be trusted to invest wisely, then youd better not leave John Q. Public alone with his own money.

     Recent research suggests that people, by nature, often make poor economic decisions, Gosselin wrote.

     The problems with this logic are numerous. The most glaring is that President George Bushs plan for personal retirement accounts does not give people unlimited freedom to invest and possibly to lose their money. Gosselin did include some truth about the White House plan such as the fact that account holders would be allowed to invest in only a handful of conservative stock and bond funds but he buried that nugget at the bottom of his more than 2,000-word story. And he included only one short quote from a Bush spokesman, while the rest of the story was devoted to undermining the Bush plan.

     Gosselin said that the presidents accounts plan would require people to do a very good job at investing. But they wouldnt have to do any better than Congress or the other 3.4 million people already do with the Thrift Savings Plan. The presidents plan is modeled on this risk-minimizing pension system already in place for federal workers. TSP investors choose from conservative stock index funds and bonds that historically return anywhere from 1.95 to 8.6 percent (adjusted for inflation), depending on the fund. Social Securitys current payout is less than 2 percent of a workers payroll taxes, and that will worsen when the baby boom generation begins to retire in 2008.

     Ignoring these facts, Gosselin misrepresented the president by saying that Bush is going around the country telling people they have to invest in the stock market on their own now instead of getting Social Security benefits. People have grown so comfortable with stocks and bonds, he asserts, that they can invest their way to more prosperous retirements by watching their quarterly statements, adjusting their portfolios and looking out for themselves, Gosselin wrote.

     Social Security aside, the underlying assumption of Gosselins article is that people are not paying attention to their retirement plans. If true, that is not good news; however, people are free to mismanage their money just as they are free to make profitable decisions. Just because they make bad choices doesnt mean they shouldnt have the freedom to make those choices.