Is there a relationship between either trust or the location of a person’s residence and their investments
When it comes to the US market, we all know that there are reams of data to prove that the stock market outperforms the returns provided by safer asset classes over the long-term, even when the increased risk levels are taken into account.
That being the case, many researchers have wondered why isn’t everyone investing in stocks? Not only are we not all investing, but less people invest in stocks than theories suggest ought to. Researchers have named this the “participation puzzle” and have been seeking answers for some time.
The latest research by Jesse Bricker and Geng Li suggests that the levels of trust that we have as individuals play an important role in this. This probably ought not to be surprising since a direct investment into the stock market requires us to transfer money from a bank to a brokerage and for the broker to buy at what we hope are best prices, units in a company being run by people we will never meet, doing things that we mostly do not understand very well. If this isn’t a show of faith, nothing is.
Interestingly, the research is looking into whether the average credit score of the area in which people lives, has an influence on their levels and trust and therefore, willingness to invest directly into the stock market.
On top of all this, is the selection of that company. How do people select companies to invest in? Any method – such as a tip from a friend or in a newspaper – requires high levels of training to be able to do extensive due diligence and research. Not many of us are cut out for this kind of work.
Then, we must consider that the financial crisis of 2008 and the revelations that came from it must have convinced many people across the United States and the rest of the world that the game is rigged and market participants have a huge advantage over the rest of us. Even if people do not believe that, the wild swings in prices could convince almost anyone that there is a very strong, but hard to predict, relationship between prices and psychology.
Who would want to play in a game like that?
And yet, for the sake of our retirements, mortgages and kids college funds, we must play in that game. The question then is how best to approach it.
We asked the team at StockExchangeSecrets.com, a website written to help educate investment beginners, their thoughts. They recommended that we follow the investment thinking process laid down in 2014’s best seller by Tony Robbins, Money: Master The Game. While they admitted that some of the elements are not easy to follow, they described it as the best introduction to how to think and make financial decisions that they have read.
With a solid mental framework we can all make better decisions and ultimately, investment success is highly dependent upon an ability to make logical, well reasoned, decisions. Hopefully this will lessen the impact of trust or zipcode on market participation by the population at large and help to close some of the funding gaps in our retirement planning along the way.