Weekly Wrap: Fund Upgrades, Rising Tech Stocks, and IRA Tips

Editor's note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.

Our three children--all high-school seniors--headed back to class this week. If asked, “How did you spend your summer?,” I suspect each would’ve answered, “Overwhelmed.” During the summer, they toured the colleges on their shortlists. They met with admissions counselors. They honed their resumes of extracurricular activities. They attended personal-essay-writing boot camps and endured critiques of those essays from each other--and, perhaps worse, from their mother.

In what was a happy coincidence of timing, I listened to last week's episode of The Long View podcast featuring Morningstar director of behavioral finance Sarah Newcomb on the drive home from our last college visit. What struck me: I could apply so many of Sarah's behavior-based tips for how to get one's arms around overwhelming financial tasks to my family's ongoing college search process.

Here are three of my top takeaways from Sarah's conversation with The Long View hosts Christine Benz and Jeff Ptak. Don't worry--I'll stick with the financial applications (not the college search implications) of Sarah's insights!

Embrace rules of thumb and smart shortcuts. Sarah is a fan of both because they distill complex matters into simpler ideas that can get us moving forward, thereby working with our brains rather than against them.

Real-world examples of these shortcuts in the financial arena include the oft-cited “save 20% of your income” rule, or the shortcut that the percentage of your portfolio dedicated to equities should be 100 minus your age. Morningstar’s ratings (for both funds and stocks) fall into the “smart shortcut” bucket, too.

Of course, those of us who’ve been investing for a while recognize that these rules of thumb are often just starting points. In fact, some might argue that such shortcuts oversimplify things. But if simplification at least gets someone thinking about a challenge or task rather than avoiding it entirely, that’s a step in the right direction.

Make "good enough" decisions. During the conversation, Sarah discusses two different mindsets: the maximizing mindset and the "satisficing" mindset. The first is about finding the "perfect" choice, while the latter is satisfied by meeting or exceeding a particular standard that one sets. While research shows that those with a maximizing mindset often make objectively better decisions, they aren't as happy with their choices as satisficers. Maximizers are rarely satisfied, as they're always looking for a better alternative.

What might that mean in investing? Assembling a portfolio of low-cost index funds instead of trying to find “winning” portfolio managers who can consistently beat the market. Or sticking with a three-fund portfolio--or even a target-date fund--instead of attempting to build a perfectly optimized portfolio. There might be “better” alternatives than these “good enough” options--but you might constantly be looking for them.

Train your brain to think further ahead. This is one of my top Sarah-isms, one she's written about before. The idea is to picture yourself in your future. Use concrete details, because the better you can visualize something, the less abstract it'll seem. And if something is no longer abstract, it's easier to plan for, because you'll be more emotionally engaged with it and view it as an attainable reality.

This is, of course, a great piece of advice for those saving for retirement--or even better, for those who aren’t saving, or not saving enough. Picturing what your specific retirement might look like (maybe by even doing a trial run, as my colleague Christine Benz has suggested) may allow you to better sacrifice the immediate gratification that spending often brings in order to save for the specifics in that retirement vision.

So as our family continues its quest for finding the right colleges, we’ll take those smart shortcuts where we can and make good enough decisions. And my husband and I should probably begin visualizing what’s currently pretty abstract: how we’ll fill our empty nest a year from now.

--Susan Dziubinski

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