Retirement Planning
You’d Expect Better From the Government’s Top Investment Experts
SEC quiz, well intentioned, could do more to educate investors
Anyone who owns a mutual fund or exchange traded fund (ETF) relies on the oversight of the Securities and Exchange Commission (SEC), the government’s regulator for all things fund related.
But if you’re looking to become a smarter, safer and more informed investor, the SEC’s monthly online investor quiz sadly falls short. Despite obvious good intentions, some of the questions miss an important opportunity to deliver key information about investing and investments.
The July quiz had a missed-opportunity question:
Bitcoin…
- Is a digital asset.
- Relies on blockchain technology.
- Has been called a “virtual currency” or “cryptocurrency.”
- All of the above.
The answer is D. But from an educational perspective, it seems odd that none of the options were “is speculative” or “is risky.” Odd, because that’s exactly what a different division of the SEC warned in May. Leveraging its oversight of mutual funds, some of which invest in Bitcoin futures, the SEC was pretty clear in a public statement: “...investors should understand that Bitcoin, including gaining exposure through the Bitcoin futures market, is a highly speculative investment. As such, investors should consider the volatility of Bitcoin and the Bitcoin futures market, as well as the lack of regulation and potential for fraud or manipulation in the underlying Bitcoin market.”
A question on margin investing, or borrowing money so you can buy more stock, similarly informs but fails to warn of the substantial risks.
Other questions stop short of offering a full-enough explanation to empower investors toward better thinking:
Q: Olive and Mark start working in the same year and plan to retire after 40 years. Olive contributes $500 per month until retirement in an employer sponsored retirement plan. Mark doesn’t make any retirement contributions for 20 years, then contributes $2,000 per month for the remaining 20 years. Assume both employees earn an average investment return of 7% for their contributions. After 40 years, who will have more retirement plan assets?
A: Olive lands in retirement with more money: nearly $1.2 million compared to $983,000 for Mark.
Unfortunately, in the full answer to this question the SEC whiffs on calling out the big message. The SEC doesn’t explicitly show the math that over the 40 years, Olive invests $240,000 of her own money, while Mark, pressured to play catchup over a 20-year investment stretch, plows in $480,000 of his own money. The biggest educational takeaway should be: If you start saving early you need to save a lot less of your money because what you do save has more time to enjoy compound growth.
Investing quiz questions that do help educate
Happily, some questions are well drawn and helpful. A few examples:
Q: Which is a red flag for investment fraud?
- Information available on EDGAR database
- Risk of losing all available funds
- Fees to buy, own, and sell the investment
- Promises of guaranteed investment returns
The answer is D. The SEC goes on to explain: Many fraudsters spend a lot of time trying to convince investors that extremely high returns are “guaranteed” or “can’t miss.”
As obvious as this may be for some, it is a warning that many fail to grasp. A good guardrail to keep in mind is the yield of the 10-year Treasury note. In terms of investment returns, this is a solid benchmark for a guaranteed return. Right now it yields less than 2%. If someone is telling you they guarantee you can earn a multiple of that, your fraud radar should shoot too high.
Q: Riley’s investment account has $10,000 in value. If Riley’s investment account earns an average investment return of 8% over the next nine years, the total value of Riley’s investment account will be approximately:
- $17,000
- $20,000
- $32,000
- $40,000
The answer is $20,000. The SEC seems enamored with teaching investors the “rule of 72,” as similar questions show up in different quizzes.
The rule of 72 shows you how fast an investment will double based on an expected annual rate of return. The math is simple: Divide 72 by your expected rate of return. In this example, 72 divided by eight = nine years.
Alas, the SEC makes this lesson far harder than it needs to be. It would have been easier to just ask, “at an 8% annualized rate of return how long will it take Riley’s investment to double?”
That said, the Rule of 72 is an easy-to-remember rule of thumb you can compute on the fly. If doing the math helps motivate you to save, and save more, that’s a good win. But it only serves you well if you plug in a rational rate of return.
The SEC would be quick to tell you that past performance is not a guarantee of future performance. Understood. But if you want to play around with the rule of 72, keep in mind that the long-term average return for a portfolio invested 80% in stocks and 20% in bonds is 9.8%, and a 50-50 portfolio’s long-term average return is 8.7%, using data that stretches back nearly 100 years.
Those are rational numbers to plug in if you’re investing for the long term. Then to be smart, knock 3 percentage points off of the first number you used, and run the rule of 72 again. Just to give you a clear-eyed sense of how things could play out if the future is a bit rockier for your investment portfolio. If that gives you pause, you have time to react. Save more. Reduce your expenses today. That frees up more money to save, and also means you have a less expensive lifestyle you need to finance in retirement.
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