Beware the Bull in Retirement Yellow Brick Road

How to Travel Safely Down Retirement Yellow Brick Road

The past few years, we’ve seen a lot of people happily talking about the gains they have been seeing in their 401k accounts. They’re sharing return numbers with others online and in the grocery store. It would seem like the kind of talk you’d want to hear.

Please don’t get me wrong. It’s great to see so many people happy that their retirement accounts are increasing in value. But there is a very important message to convey concerning these high returns.

Like the Lollipop Guild in the Wizard of Oz – IT AIN’T ALWAYS GONNA BE THIS GOOD!

The Facts About Returns Since blooom’s launch

Blooom launched its 401k management service in late-September of 2014. Since that time, the stock market (as measured by the S&P 500*) has had a cumulative return of roughly 28% and has averaged almost 10% per year.  In addition, the Vanguard Total World Stock ETF – a better proxy for blooom clients given its allocation to global equities – is up over 15% year-to-date! The point here is that these past three years have been a good time to be a stock market investor. Hell, it has been a GREAT time to be a stock market investor since the Great Recession (stock market collapse) of 2008-2009.

With all of these happy people, we want to make sure everyone understands that this is not always how things will go. In reality, the market will go down periodically.  In fact – It NEEDS to go down periodically. That is precisely why investing in the market carries risk and this same risk is exactly why investors who have stayed in the market for long periods of time and weathered this risk have been rewarded with much higher returns than “risk-free” investments like CDs, Government Bonds, and money market funds have produced.

4 Key Characteristics of a blooom-managed 401k

If you’re a blooom client, your managed 401k has four key characteristics that other 401k investors may not receive:

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Thanks 1 Billion Clients

Blooom Reaches $1 Billion in Assets Under Management

“Wall Street has made a habit of running in the opposite direction of investors with small accounts…maybe we should build something and run towards them.”

This was written in email from Kevin Conard, my co-founder to me late one night back in January 2013. Four-and-a-half years later that idea has evolved into a company – blooom – and we are proud to announce that we have grown faster than virtually any other robo-advisor. Blooom now manages more than $1 billion of retirement accounts for our clients.

Specifically, thousands of people from all across this country have trusted blooom with what is likely their most important and potentially most valuable financial asset – their employer-sponsored retirement account, or 401ks/403bs, as they are so strangely named.

If you’re a blooom client, I want to thank you for believing in us and starting this journey of bettering your retirement and financial situation together. The entire blooom team works hard every day to help you reach your financial goals.

Every time we receive a message of gratitude from one of our clients, we share it with the team and … everyone gets to work the next day with a sense of pride that they are truly helping people and striving to achieve greatness. Thanks to everyone once again. We will continue to provide our helpful service to all of you — in good times and bad.

Speaking of pride. We also take pride that this Kansas-based company reached the milestone faster than both Betterment or Weathfront – while doing so on a fraction of the capital. They’re peers not so much from a comparable service offering but in that they’re a benchmark for other robo-advisors. In other words, out of the gates, we have grown faster on fewer resources, as one should expect from someone managing their money.

Blooom was started in 2013 to help the traditionally un-helped.

We felt – and continue to feel — that it isn’t fair that the people who needed the help from the financial services industry the most were the least likely segment of the population get it.

You’ve done the hard part: You started saving for you retirement. Thanks for letting us do the rest.

If you haven’t already read blooom’s manifesto — here’s WHY this is all so important to us:

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6 Pitfalls Why You Don't DIY Your 401k

6 Pitfalls of Going it Alone with Your 401k

In this day and age of DIY tutorials and life-hacks, you might be tempted to do your 401k all by yourself. But be wary, brave traveler! There are several pitfalls you could get into if you follow this path.

Pitfall #1: Being Too Conservative

The old rule of thumb was that if you subtract your age from 100, then that should be the percentage of stocks in your portfolio. For example, if you were 20, then 80% of your portfolio would be in stocks, and 20% in bonds.

With Americans living longer, and empirical evidence of higher long-term returns from stocks vs. bonds, this framework is a bit outdated. Instead, raise that number to 110, or even 120. So, your portfolio would have 90-100% of stocks.

To find out why, read some friendly tips from Investopedia, and a blog that our CEO wrote.

Pitfall #2: Being Too Aggressive

We know, we know. You literally just read not to play it too safely. But here’s why you shouldn’t be too reckless with your investments. Say you’re less than 5 years away from retirement. We recommend that around 40% of your 401k get invested in bonds, with the other 60% in stocks.

As folks start getting closer to retirement, their nest egg needs to be safer from a market crash or a decline in stock prices. That’s why blooom continually monitors and periodically rebalances our clients’ accounts as they get closer to retirement, bringing down the percentage of stocks and increasing bonds.

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401k Fees Eat Holes in Money Socked Away

What The Heck are 401k Fees and How Do You Kill Them?

The saying “ignorance is bliss” doesn’t apply to hidden 401k fees. We frequently reference them … and for good reason. According to research from NerdWallet, people with 40 years until retirement could lose as much as $500,000 because of investment fees.

Worse yet. Most people aren’t AWARE they are paying these fees. An incredible 92% of Americans have no idea how much they pay in 401k fees.

We’re going to provide a simple break down of the fees found in your 401k. We’ll also review what, if anything, you can do about them.

Providers Have Three Main Types of 401k Fees

Investment fees are specific to each investment option your plan offers and typically the loftiest type of fee. Luckily, you can usually control – or get help to control – these types of fees. They can be reduced by simply choosing to invest in funds that have lower expense ratios.

Other types of 401k fees, administrative and service fees, are more difficult for you to reduce, as they are an innate part of your provider’s plan.

Here’s the quick overview of the three main types of fees:

  1. Investment fees – Expressed as an “expense ratio” of anywhere from 0.01% – 3%. Our team will call these “fund specific fees” or “fund fees.”They cover the management of the investments within your plan. And they typically represent the largest component of fees. Generally assessed as a percentage of assets invested, they are deducted directly from your investment returns: Investment fees are taken out annually as a percentage of your investment.
    • Sales charges – transaction costs for buying/selling shares
    • Management fees – for managing the assets of the fund, often used to cover administrative expenses
    • Other fees – to address services such as furnishing statements
  2. Plan administration fees – The fees charged to keep your plan running. These fees include recordkeeping, accounting, legal and trustee services that are necessary for administering the plan.
  3. Individual service fees – typically associated with optional features offered under a 401k plan. Some additional services may include access to a customer service representative, educational videos or seminars, planning software, investment advice, or online transactions. The more services provided, the higher the fees. The cost typically corresponds with the size of your employer’s 401k plan, i.e. there are benefits of scale (the following are the typical fees by employer size):
    • 1.4% for small employers
    • 0.85% for medium-size employers
    • 0.5% for larger employers

Investment Fees Pile On – They’re Vermin You Want to Control

We sometimes hear from people that they don’t need to worry about investment fees because their account balance is relatively small. But here’s the rub: Fees negatively affect your 401k (or other employer-sponsored retirement plan) in several ways.

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When Market Tanks ... Do These 3 Things

3 Things You Should Do With Your 401k When The Market Tanks

Disclaimer:  I am not predicting the market tanks tomorrow, next week, next month or even next year. Contrary to what the media or “pundits” try to convince you — it is impossible to predict when the market will drop or what will ultimately cause it. That said, I am 100% convinced that the market will drop at some point.

In fact, at blooom – we guarantee that it will drop at some point in the future. In reality, it isn’t IF the market will drop. It is WHEN and how many times over your investing lifetime will it occur. We try to inform our clients about this as often as possible and set the expectation that market drops – although painful at the time – are perfectly normal.

The mistake average investors make most often is they take the assumption that something is wrong with the market or their portfolio and they bail out of their investments right in the midst of the market decline. They do this thinking that they are doing the “safe” thing but it is often the absolute worst thing you can do. It is a huge reason why average investors perform so horribly when left to their own devices.

So what can you do the next time the market tanks?  At blooom, we advocate that our clients do these 3 things.

1. Set Your Expectations Ahead of Time

Just knowing that it is perfectly normal for the market and the value of your account to decline from time to time is half the battle.

History has repeatedly shown that the right thing to do — regardless of the circumstances causing the market decline — is to not panic, sit tight and just get through it. You probably know that the average rate of return over the stock market over the past 30, 50 whatever years is something close to 10%. Guess what, the 10% rate of return was calculated by STAYING in the market 100% of the time. Even in the last 20 years (1997-2016), the average investor return – 2.29% — has paled to that of the S&P’s 7.68% 1.

Achieving the S&P historical numbers does NOT assume that an investor had a fully functioning crystal ball. They weren’t hopping out of the market before a decline and back into the market right before it turned upwards. That rate of return assumes you left your investment the heck alone!

Start prepping your mind today — when the waters are fairly calm — for the fact that your 401k will decline in value when the market drops. This does not mean anything is wrong with your 401k, the investments, or blooom!  I promise you — after 22 years of experience working with clients to help them save for retirement — if you can come to grips and expect the market and your portfolio to drop from time to time, you will put yourself in a much better position for investing success.

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