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Investing: What Can Investors Learn from Warren Buffett’s 2016 Letter to Shareholders?

I heard a great conversation today with Roger Lowenstein, former WSJ columnist and Author of Buffett: The Making of An American Capitalist, America’s Bank and When Genius Failed, on the Masters in Business podcast. When asked about how he learned about investing, he mentioned how much he had learned from reading Warren Buffett’s Annual Letter to Shareholders. I thought I would dissect his 2016 Letter and share his often folksy advice in an abbreviated format (the letter is 29 pages long).

I thought you might find these insights useful:

  • Two things to keep in mind during market declines which captures the psychology of investing (not his use of the phrase “sit for an extended period”):

Just Say No To Overdraft Protection!

It’s a $33 billion error that consumers continue to make. From Wall Street Journal:

Banks and other financial firms in 2016 generated the highest level of fees in seven years related to overdrafts on checking accounts, marking a turnaround for a charge crisis-era regulation tried to rein in.

So-called overdraft fees totaled $33.3 billion in 2016, up about 2.5% from 2015 and by 5.4% from 2011, according to Moebs Services Inc., an economic-research firm. Overdrafts occur when consumers make transactions that are larger than their checking-account balance.

Try this tomorrow in your class:

Question: How Many Borrowers Can’t Repay Their Student Loans?

Answer (from Consumer Federation analysis reported by CNBC): In 2016, more than 4.2 million out of 42.4 million borrowers were in default. This is a 1.1 million student increase from 2015.  Default is a condition where the borrower has not made a payment on their loan for 9 months.

What makes this more troubling is that these increases in defaults are occurring at a time when the economic statistics, especially unemployment rates are at historical lows (from Washington Post): 

What’s New In Behavioral Economics?

I thought I would highlight some recent behavioral economics resources that caught my eye recently:

  • ArticleHow Behavioral Economics Can Help You Retire Rich (Bloomberg article). Have your students read the article and ask them ONE action they will take based on these findings. Here are some of the interesting experiments described:
    • How to get people to save more with their tax refunds: “In one experiment, a control group of users was sent a simple text after a refund showed up in checking. It asked what percentage of the refund they’d like to save. The answer: an average of 10 percent. The experimental group was messaged before getting any refund check. Its text said that members might get a tax refund and asked what percentage of it they’d want to save. They answered 15 percent.”
    • How the 401(k) structure encourages savings: “A 401(k) plan is a pre-commitment device. “Imagine a world in which you didn’t have 401(k)s and every month you decided how much to save,” Ariely said. “It would be a terrible world, from a savings perspective.” Even better are automated programs that bump up contributions into 401(k)s. Fidelity Investments did some math on that. They used the example of a 25-year-old employee making $40,000 and getting annual raises of 1.5 percent after inflation. If she bumped up the percent of salary going into a 401(k) plan by 1 percent every year for 12 years, she’d have $1,930 more (PDF) in monthly retirement income.
By |March 8th, 2017|Article, Behavioral Finance, Savings, Video Resource|

Question of the Day: Why Are Car Insurance Rates Going Up?

Answer: More accidents due to “distracted” drivers.

Ok, I know you are not teaching a driver’s ed course, but this is an incredibly important message to get across to new drivers: Don’t Text While You Drive! Here’s the data showing the increase in car-insurance premiums due to more driving and more crashes (from WSJ (subscription)):

How Can You Protect Your Online Accounts from Hackers?

Some great advice from WSJ (subscription) as identity thieves continue to develop more sophisticated strategies to steal your identity. Moral of the story: You are your own worst enemy when it comes to giving up information when you should not be.

A few highlights and some strategies to protect oneself:

  • Phishing is the most common online scam:
By |February 28th, 2017|Article, Current Events, Identity Theft|

Question: What Percentage Of Workers Contribute To a 401(k) Plan?

Answer (courtesy of Bloomberg): About 1/3

Why is this important?

Pensions are becoming increasingly scarce for young people, so the 401(k) will likely become the primary source of financial support for retirees outside of Social Security:

According to a Pew Charitable Trusts analysis of survey data released Feb. 15, only 10 percent of workers over age 22 have a traditional pension. Just 6 percent of millennials have a pension while 13 percent of baby boomers do.

Why are so few contributing to their 401(k)? Here are a few theories:

How Is The New FAFSA Timetable Impacting College Offers?

I was wondering about this question. so was happy to see this article in the WSJ last week (subscription). Our post last September described two of the major changes to the FAFSA. First, families could now complete the FAFSA starting October 1st (previous deadline was January 1st). Secondly, the financial information provided on the FAFSA now will come from prior prior (not a typo) year’s tax return. Let me explain. Those families completing the FAFSA in October 2016 for the 2017-18 school year, data from their 2015 tax year would be used.

The most dramatic impact is that students should expect to receive offer letters from colleges SOONER with about 50% of colleges expecting to send their need-based offers sooner. Here’s the data: