White Paper on Computing Tools for Promoting Sound Investment Decisions (Latest Revision)
Dec. 17, 2014
K. Jeremy Ko
Abstract:
Numerous academic studies document that retail investors make systematic “mistakes” in assessing the risk and return characteristics of their portfolios. In this paper, I introduce a computing tool which can help individuals better assess these characteristics by displaying simulated portfolio returns. This paper features a demo version of this calculator for the federal government’s Thrift Savings Plan. The output shows that riskier investments can lead to higher wealth outcomes than less risky investments although this outperformance is sensitive to assumptions about the mean return, particularly at long horizons. In addition, the risk of such investments does not decrease but rather increases with time horizon. I conclude by proposing ways in which to study the impact this tool can have on investors’ behavior.