Trust: A firm belief in the reliability, truth, ability, or strength of someone or something.
Many times each day, you and I are asked to put our trust in something or someone, implicitly or explicitly. For example, we assume that all of the gadgets we rely on will work flawlessly, such as the alarm clock, stove, microwave oven, coffee pot, toaster, TV set, automobile, air-conditioning, refrigerator, smart phone, lap top. Every ad we see on TV, hear on the radio or see on billboards asks us to trust that whatever product or service is being offered will completely satisfy our every need or want (“Yes, Brian Urlacher, former Chicago Bears linebacker, has hair now and so can you!”).
Trust is indispensable when it comes to our health. We trust doctors to make the right diagnosis and prescribe the right medicine. Trust is also very important when it comes to our wealth. We need good tax, legal, financial and investment advice and we need to believe in the soundness of our financial institutions that safekeep our assets and in the financial markets that allow us to trade stocks and bonds. We want to believe that the regulatory watchdogs like the SEC and FINRA have our backs and that the Federal Reserve Board will make the right monetary policy decisions.
In 2008, two top business schools in Chicago, the University of Chicago Booth School of Business and Northwestern University’s Kellogg School of Management (my Alma Mater), collaborated to produce the Financial Trust Index to measure the “confidence Americans have in the private institutions in which they can invest their money.” The authors define trust as “an expectation that a person (or institution) will perform actions that are beneficial or at least not detrimental to others.” The index is based on a quarterly sample of 1,000 American adults who are the financial decision makers in the household. It consists of four sub-components: trust in the stock market, trust in banks, trust in mutual funds and trust in large corporations.
According to their most recent press release, “Ten years after the financial crash of 2008, Americans’ trust in financial institutions is on the rise, increasing from 22 percent in 2008 to 28 percent in 2018.” This should come as no surprise, considering that we are now officially in the longest running economic expansion in U.S. history, and the S&P 500 Index has returned an average of 14.7% per year for the past ten years through 6/30/19.
More surprising to me is how the four sub-components of financial trust compare to one another. Here is a chart going back to the inception of the index in December of 2008 through December of 2018.
Notice that “Trust in the Stock Market” (blue line) is significantly lower than “Trust in Mutual Funds” (yellow line). This puzzled me. My first thought was that both lines should be identical, since mutual funds are simply portfolios of stocks. Why are they so far apart? I assumed that part of the answer had to do with the fact that mutual funds tend to be very well diversified and they are managed by investment professionals.
For a more complete answer, I spoke with one of the authors of the index, Dr. Paola Sapienza, Professor of Finance at the Kellogg School of Management. Professor Sapienza, who has done extensive research in the topic of consumer finance and behavioral economics, agreed with my assessment, but also mentioned that most people don’t have much experience with opening a brokerage account and buying stocks directly. Many people, however, are used to choosing mutual funds in their 401(k) accounts, and this familiarity tends to increase trust over time.
Professor Sapienza emphasized that this financial familiarity is very emotional. In fact, she said that the idea of financial trust is really all about financial anxiety. Thus, investors have to address the emotional and psychological aspects of investing, and to do that they need good financial advisors. She also mentioned the need for families to discuss their finances with their children.
At Coyle Financial, we understand how financial anxiety can affect our sense of well-being. We work hard with our clients to keep the lines of communications open. We also encourage our clients to have open and honest discussions about family wealth with the next generation at the appropriate time.
We value the trust you, our clients, have placed in us for over forty years. We know that that trust must be earned every day and we thank you for it.
John serves as Chief Investment Officer for Coyle Financial Counsel and is responsible for overseeing the investment process. John’s prior experience includes managing institutional fixed-income portfolios for corporations, pension funds, non-profit organizations and foundations at several large, global asset managers. With more than 20 years of institutional investment experience, he is energized by helping individuals understand the role investing plays in meeting their long-term financial goals.
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All information is from sources deemed reliable, but no warranty is made to its accuracy or completeness. This material is being provided for informational or educational purposes only, and does not take into account the investment objectives or financial situation of any client or prospective client. The information is not intended as investment advice, and is not a recommendation to buy, sell, or invest in any particular investment or market segment. Those seeking information regarding their particular investment needs should contact a financial professional. Coyle, our employees, or our clients, may or may not be invested in any individual securities or market segments discussed in this material. The opinions expressed were current as of the date of posting, but are subject to change without notice due to market, political, or economic conditions.
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