Now's Not The Time To Get Cocky With Your 401(k)
Let’s assume you have worked hard and saved for many years now and that you have quite the nice balance in your 401(k) plan. Think you’re home free – think again! If history can teach us anything it teaches us that as investors are their own worst enemy. Dalbar Research produces a report each year called the Quantitative Analysis Of Investor Behavior, and each year the report says the same thing… Investors are shooting themselves in the foot over and over by buying and selling at the wrong times and for the wrong reasons. In your 401(k) this could be for you, neglect, buying more of what just went up, having no idea whatsoever about what you are doing and why, having no understanding about your risk, asset allocation, cost and expected rate of return, under funding you plan, or just throwing it all in a low cost and under diversified target date fund and crossing your fingers while hoping for the best. It might be worth knowing that most 2010 target date funds lost more money than anyone imagined during the market crash of 2008 and many employees were forced to go back to work.
We humans are creatures of our instincts and emotions and nowhere does that show up better than with our money. In many well documented studies, investors routinely only earn about half of the returns for which they are taking the risk because they are making decisions based on instincts and emotions rather than by using a rules-based system for investing. While our instincts and emotions might have saved us from the saber tooth tiger a zillion years ago, they are the exact toxin to our investment process that causes us to come up so short today. We humans have “blind spots” when it comes to our money, and most investors have no idea about how these blind spots destroy their wealth.
According to Dalbar the average equity investor is only earning a paltry rate of return over the past 30 years of around 4% due to poor investment choices, behavior, and a general lack of knowledge and strategy. With inflation at around 3% most investors are simply not getting ahead at a sufficient pace to fund the retirement that they dream of. When you are not getting ahead, little by little those dreams start to fade away and that’s a shame, especially when it may not have to be this way. Question? What do YOU have at stake in all of this and can you afford ANY mistakes with your 401(k)?
I want you to be keenly aware that other people are profiting from the described dysfunction of the masses. Vast amounts of wealth that are transferred each day from undisciplined and imprudent investors, to those investors who have found mastery of the basics of investment, which are, simply, cash flow management, dollar cost averaging, asset allocation, diversification, behavior, re-balancing and risk management. In my opinion it is simply deciding which side of the coin you want to be on, and to quote Warren Buffet you must be “greedy when others are fearful, and fearful when others are greedy”. Sounds easy, but how do you do that? The answer in our opinion is “rules-based investing” planning and accountability, discipline, strategy/structure and knowledge, but I will save that conversation for another day.
Wall Street and all of the online Trading platforms are complicit in the dysfunction and they have figured out how to make lots of money on all of your trades. Every trade comes with a bid/spread/ask cost which makes Wall Street and the broker-dealer industry rich. The mantra is for you to get an app and then “trade like a pro”, that is until you are broke and/or all of your money is gone…..Don’t think this does not happen to good people and don’t be blind to the well documented studies that prove that even the so called “best of the best” at picking stocks are no better statically than a monkey throwing darts at stock picks……There is an uncanny resemblance of the online gambling sites to many of the well-known stock trading platforms.
So, let’s say that you come to the end of the line and that you have a million dollars in your 401(k) plan. Have you ever figured out how much income that will bring you in retirement? Financial Planners rely on statistics and models that suggest that if you are pulling out more than 4%, in this case 40K per year, you run the risk of running out of money while you are still alive. My newsflash is that 40K of annual income today is not a lot of money. Knowing you have a cool million might make you feel good, but I don’t think you can go bragging to your friends about 40K of income. Now consider that your 401(k) has never been taxed which means that you owe tax on that 40K. Now you're looking at closer to 32K per year which is less than 2700 dollars per month; not a retirement income that you want to brag to the world about I would assume, and not an income that would allow you to do as much for yourself and/or others than what you might have dreamed of when you were thinking about your future you.
What I would almost pray that you would take away from this article is the understanding that you are going to need a lot more money for retirement than you have ever have considered, and that you likely cannot afford imprudence, inefficiencies, mistakes and blunders, and lessons learned the hard way. The markets send out very expensive tuition bills that most investors simply cannot afford. The cost ends up being dreams for the future and the ability to live a powerful and generous life.