Proponents of Social Security privatization say that the average investor will do better investing the money that goes to Social Security taxes in the stock market. The chart above, which is from Business Insider, shows the problem with this.
It is true enough that, over a long period of time, stock market averages, such as the Russell 2000 or the Standard & Poor’s 500, do better than Treasury bonds. But most of us don’t do that.
We get overoptimistic when stock prices are going up and panic when stock prices are going down. So we buy high and sell low—the opposite of what a smart investor should do.
The following is from an exchange between Barry Rithotz, a financial adviser and blogger, and James O’Shaughessy, of O’Shaughessy Asset Management, on Bloomberg Radio.
O’Shaughnessy: “Fidelity had done a study as to which accounts had done the best at Fidelity. And what they found was…”
Ritholtz: “They were dead.”
O’Shaughnessy: “…No, that’s close though! They were the accounts of people who forgot they had an account at Fidelity.”
via Business Insider.
Ritholtz told about some of his experiences in estate planning, where a family fought over inherited assets for 10 or 20 years, didn’t touch them in the meantime and found those 10 or 20 years were the best period of performance.