Shiller: Low Fat Financial Products

1019181_46648514Yale economics professor Robert Shiller has hit a number of well-timed home runs. When other authors were flogging Dow 36,000, he was writing his mean-reverting Irrational Exuberance,which hit discerning book readers just before day-traders saw their Nasdaq stocks go lemming.

Similarly, as real estate investments were featured on the covers of the major newsweeklies – a contrarian indicator for many – he and Karl Case were developing housing price indexes that suggested an overvalued market. Those indexes have since become among the most-watched for readers of the economic entrails of the Great Recession.

So will he be third-time lucky – or prescient? There are significant stakes here – for retail and DC plan investors – because he’s tackling financial literacy. His proposals aren’t novel. It’s the same concept as nutritional labelling.

What’s interesting is what Shiller (and his colleagues – it’s part of a new book) leaves out. He doesn’t say this product labelling should advise on whether the ingredients will make you fat, or make you poor, but there is a heavy emphasis on risk: “The group recommends that the standardized disclosure should give the consumer an understandable measure of long-term risk. This might include such measures as the annualized volatility of the inflation-adjusted ten-year returns, and the range of real payoffs that an investment might earn in ten years, including 5th, 50th, and 95th percentiles.”

As for returns, like the pounds predicted to be lost from a fad diet, they’re best left not mentioned. “This is because most investors overreact to past returns, shifting their money around in a largely futile effort to channel it to managers who can beat the market. This requirement is analogous to that of nutrition labeling, which does not allow listing of nutritional quantities that are not significant in the usual serving size.”

Well, that’s one way to avoid overweight positions.