Smart Advice for the HuffPost Investor: Two Studies Wall Street Wants to Bury
I recently was on national TV discussing 401(k) plans and my new book, The Smartest 401(k) Book You'll Ever Read. The producer of the segment wanted some controversy so she had an investment advisor appear with me.
The investment advisor recommended that employees select only actively managed funds in their 401(k) plans and use "independent advisors" (like him) to help them with their selections.
Most investors follow this advice.
How is this working for them?
Not well.
In one study (that Wall Street really does not want you to know about) the authors looked at the performance of 2100 mutual funds from 1975-2006. How many of the fund managers of these actively managed funds exhibited an ability to outperform the markets? 0.6%, which is statistically the same as zero!
Why then do investors continue to flock to these funds? The authors of the study accurately conclude that "[P]erhaps a class of unsophisticated or inattentive investors remain shareholders in funds after they have clearly demonstrated (over time) their inferior returns."
Another study demonstrates the consequences of following the advice of brokers and advisors who push actively managed funds on their trusting clients.
The highly respected research firm, Dalbar, Inc., periodically takes a look at how investors have fared with their mutual fund investments. In its latest report, Dalbar examined actual investor returns for the twenty year period ending December 31, 2007. The results were not pretty.
The average equity investor earned a paltry annualized return of 4.48%, barely outpacing inflation, and underperforming the S&P 500 index by a whopping 7%!
The lessons to be learned from these two studies are clear: Avoid hyperactively managed funds and the brokers and financial advisors who tout them. Focus on your asset allocation and invest in a globally diversified portfolio of low cost index funds or Exchange Traded Funds.
There is just once catch. The securities industry, with the help of compliant employers, has rigged the 401(k) system (which has over $6 trillion in assets), so that following this advice is difficult, if not impossible. Most 401(k) plans have a confusing array of underperforming hyperactively managed funds and few, if any, index funds.
The expense ratio of the funds offered to plan participants is as much as 800% higher than the cost of index funds. You can do the math. By confining choices to hyperactively managed funds, the mutual fund industry profits handsomely at your expense.
Outside of your 401(k) or 403(b) plan, you have a choice. Be sure to make the right one.
The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein.
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Most retirement/investment funds are a racket. My wife had 10 choices when she started a new job recently in her 401(k):
- 7 were bullish stock funds ...not good in this environment.
- 2 were bond funds ...research turned up that they had mortgage backed debt.
- 1 was Treasury bills ...we went with this one, even though the return they listed was the worst at 1.5%!
Brokers have the most appropriate name ...they make you broker.
ETFs are the way to go ...double short ETFs are even better! :)
Brokers have one basic goal...to separate you from your money.
Just ask this one question of the whole financial services brokerage businesses: Where are the client's yachts?
Gotta agree, Mr Solin ... low-cost index funds are the ONLY way for individual's to invest, IMO. The vast majority of other options result in us giving large sums of money to a broker who invests it in new houses, cars, and other stuff for their families. ;-D
the investing public should know that almost all brokers, investment advisers and fund managers are salesmen first and foremost while the industry paints them as investment gurus who have knowledge you can't possibly understand on your own. once they have your money they rely on trust and inertia(your unwillingness to move it) to make their mortgage payment.
Dan, I have a real zinger of a question for you. Follow me here...
First, I currently live and work in Europe. Given the current tax laws and my Gross Adjusted Income, my entire paycheck is exempt from federal income tax.
Second, with my company I have the option to opt into a 401(k) plan. It is a decent one, where they match 50% of my contributions up to 12% of my pay. (meaning I'll contribute up to 12% of my gross pay, and they'll match with 6% of my gross pay)
Third, I have a great, great selection of mutual funds in my 401(k) plan with TransAmerica. I am currently invested in a Vanguard fund of index funds, the 2045 Retirement Plan. (VTIVX)
So, I've got a solid mutual fund, great matching options, and no federal income tax. Where's the problem?
It's like this: someday I will retire, and want to start drawing money out of this 401(k) account. I'm fairly certain that even though I have EARNED the money in a tax-free status, that when I retire and am in the USA and am drawing the money in a non-tax free status, I'll have to pay taxes on the outlays.
Now...the question is this. Would it make more sense to avoid this 401(k) plan altogether and just invest on my own, never having to pay taxes on the initial principal? Or do you think the 50% matching more than compensates for the ultimate withdrawal prize?
If you take the contribution from your employer and then take out the money the following year for a 10% penalty you will net a positive 4.2 cents per dollar invested. I guess it depends on convenience/inconvenience to do it since it is not a big winner.
Just one last comment : the FDIC has a 10 billion dollar insurance fund. It never needed more than that before.
Some say it has a more than that because they can get money from the government, when they run out.
Diesel is favored, in a large storage tank.
Does anyone really care about gold? You cannot eat it.
Money under the mattress may suffer serious inflation. Manhattan investors are buying commodities and warehousing them.
I just cashed in one mutual fund account, and have put the money into a (big) bank CD. Have I gone from the frying pan into the fire? There is the FDIC and such, but can I trust that after the Freddie Mac and Fanny Mae debacle?
If you are over 100k in any account you are asking for trouble, or another way of looking at it... you are assuming risk without any reward.
it is a sad day in America when people are worried about money they put in a U.S. Bank
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