BUSI 538 Week 6 Discussion Board 2: Reply Posts Example

Discussion Board 2: Reply Posts

BUSI 538 Investments and Derivatives, Discussion Board 2: Reply Posts

Thread by [Student Name]

The two classmates and their threads are composites; the textbook, research and Scripture cited are real, and the requirements follow Liberty's public course guide for BUSI 538.

Reply to Natalie

Natalie, your thread used Proverbs 14:15, which contrasts the simple person who believes whatever he is told with the prudent one who thinks before moving (English Standard Version Bible, 2001/2016), to explain why you chose a single target-date fund for your 403(b) rather than picking individual funds. I think your reasoning is sound, and I want to add a reason to keep applying that proverb after the choice is made.

Target-date funds solve a real problem. Benartzi and Thaler (2001) documented what they called the "1/n" rule among retirement plan savers: dividing their contributions evenly among whatever funds the plan offers, so that the share of their savings in stocks depends mostly on how many stock funds happen to be on the menu. A saver in a plan with four stock funds and one bond fund ends up heavily in stocks; a saver in a plan with the reverse mix ends up mostly in bonds, regardless of age or goals. A target-date fund replaces that accident with a deliberate allocation that gradually shifts from stocks toward bonds as retirement approaches, which is the age-based principle Bodie et al. (2017) describe for investors whose human capital, their future earnings, declines over time.

But target-date funds are not all alike, and here the proverb's call to give thought to one's steps applies again. Funds with the same target year can hold very different proportions of stocks, especially near and after the target date. Some follow a glide path "to" retirement, reaching their most conservative mix at the target year, while others continue shifting "through" retirement for many years. Their expense ratios also vary widely, and because costs compound just as returns do, an extra 0.5 percent in annual fees can shave a noticeable share off a balance over 30 years. Bodie et al. stress that an investor's allocation should reflect personal risk tolerance and circumstances, not only age, and a fund designed for the average saver may not fit someone with a pension, a large emergency fund or an unusually secure job.

I would suggest three steps: read your fund's prospectus to learn its stock allocation at your target date, compare its expense ratio with the low-cost index alternatives in your plan, and decide whether your circumstances call for a fund with an earlier or later target year than your expected retirement. That kind of review is exactly the prudent consideration the proverb describes, applied once a year rather than once a career.

It may also help to check how much of the fund sits in international stocks and in inflation-protected bonds, since those choices reflect the fund manager's assumptions rather than yours. Did your plan's materials explain whether your fund's glide path goes to retirement or through it?

Reply to Aaron

Aaron, your thread built your retirement plan around Romans 13:8, Paul's teaching that the only debt a believer should carry is the ongoing debt of love, and explained that you will put every spare dollar toward paying off your mortgage before contributing anything to your 401(k). I respect the conviction behind that plan, and I agree that debt can become a burden that limits generosity and freedom. I want to suggest a way to honor the passage that costs you less.

Many interpreters read Romans 13:8 in its context, where Paul has just told believers to pay what they owe, taxes, revenue, respect and honor, as an instruction to meet every obligation rather than as a prohibition on all borrowing. On that reading, a mortgage paid faithfully on schedule is not disobedience. Your desire to be free of it is still wise, but it can be pursued alongside saving rather than instead of it.

The numbers matter here. You mentioned a 4 percent mortgage and an employer match of 50 cents on each dollar you put in, on the first 6 percent of salary, which on your income is real money left on the table. Every dollar you contribute up to that limit earns an immediate 50 percent return from the match, before any investment growth, and the contribution is made before income tax. Paying down a 4 percent mortgage, by contrast, earns exactly 4 percent. Bodie et al. (2017) also emphasize the time value of money: dollars invested at 30 compound for decades, while dollars invested at 45 have far less time to grow. Skipping the match for the years it takes to pay off a mortgage gives up both the match and the compounding on it.

Lusardi and Mitchell (2014) found that financial literacy is low even on basic questions about interest, inflation and diversification, with only about a third of older Americans surveyed answering three simple questions correctly, and that those who know more tend to make retirement plans and to build more wealth. They also found that less knowledgeable households tend to borrow at higher cost and to underestimate how compounding works, both for savings and for debt. Your thread shows unusual seriousness about money, and I think working through the comparison of the match against the mortgage rate would strengthen your plan rather than weaken your conviction.

A middle path might be to contribute enough to capture the full match, direct additional savings to extra mortgage payments and increase both as your income grows. You could also set a target date for the mortgage payoff, for example before your children reach college age, so that the goal of freedom from debt remains concrete. Once the mortgage is gone, the amount you were paying each month can go straight into retirement savings, which accelerates both goals in turn. Would that approach still feel faithful to your reading of Romans 13:8?

References

Benartzi, S., & Thaler, R. H. (2001). Naive diversification strategies in defined contribution saving plans. American Economic Review, 91(1), 79-98. https://doi.org/10.1257/aer.91.1.79

Bodie, Z., Kane, A., & Marcus, A. J. (2017). Essentials of investments (10th ed.). McGraw-Hill Education.

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature, 52(1), 5-44. https://doi.org/10.1257/jel.52.1.5