Author Archives: Chris Costello

I Guarantee that….

In the financial industry, most advisors are trained at a very early age to essentially remove the word “guarantee” from their vocabulary. For obvious reasons, when investors are dealing with managing portfolios that have any exposure to the stock market, there is never such a thing as a guaranteed return. If you want guarantees, you generally look to a Certificates of Deposit (CD) with FDIC protection or US Treasury Bonds that are guaranteed by the full faith and credit of the US Government (all jokes aside). So uttering the word “guarantee” anywhere in the same vicinity as a discussion about stock market investments is totally off limits.

Well, I am going to run head-on into the forbidden term and come right out and guarantee you something. I GUARANTEE THAT IF YOU HAVE A PROPERLY DIVERSIFIED PORTFOLIO THAT YOUR ACCOUNT WILL LOSE VALUE OCCASIONALLY.

That’s right, I said it and I will say it again. I GUARANTEE THAT IF YOU HAVE A PROPERLY DIVERSIFIED PORTFOLIO THAT YOUR ACCOUNT WILL LOSE VALUE OCCASIONALLY.
When you have a properly diversified portfolio, it means that a portion of your account will be invested in the stock market (likely both US and International markets). There has never been a period greater than a few months where a diversified portfolio didn’t lose value. Markets never just go straight up. And while historically the decline in value is temporary, it does happen and will continue to happen. Over the years, I have often told our clients that it isn’t IF your account will lose value it is WHEN and HOW MANY TIMES it will lose value over an investor’s lifetime.

Now before you start to panic I want to digress and point out that there is a difference between losing value v. losing money. As stated above, your 401k will drop in value from time to time. But for you to actually lose money in your 401k takes an additional action on your part. It is only when you sell while the market is down that you are taking the temporary decline and making it a permanent loss. That is when you lose actual money in your 401k, not simply when the market declines. (For further explanation on the difference between losing value v. losing money read my blog, If You Don’t Sell You Don’t Lose.)

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Target date funds miss the mark

Why Target Date Funds Miss the Mark

First, let me give this disclaimer: Target Date Funds are a great solution if the alternative is leaving your retirement money in a Money Market Fund. That said, there are three problems with almost all Target Date Funds inside of employer sponsored retirement accounts (like 401k and 403b plans).

What is a Target Date Fund?

Target Date Funds were meant to it simple to invest for a specific date in the future – like the year you retire. In theory, an investor can select the Target Date Fund with the year closest to when they are planning/hoping to retire. For example, a 35 year old planning to retire at age 60 might select a 2040 Target Date Fund. This single fund election is comprised of a few individual Mutual Funds to give instant diversification across asset categories: Large Company Stocks, Small Company Stocks, International Stocks, Bonds, Money Market, etc. Target Date Funds automatically adjust the risk profile of the fund (the weighting of stocks vs. bonds) inside the portfolio as the years progress. So, a 2040 Target Date Fund may have 80-90% of the portfolio in stocks, but by 2039 it will likely have adjusted the ratio closer to 50% stocks and 50% bonds/money market. This happens automatically for the investor, without them doing anything on their own. In theory, it seems fairly intuitive and a decent strategy for retirement saving. Now let’s discuss the shortcomings.

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how to choose 401k investments

This 401k Plan is a Joke! – How to choose 401k investments

I have been in the investment advisory business since the mid-1990s. I am a CFP (Certified Financial Planner) and I co-founded a wealth management firm from scratch to over $500 million of client portfolios. Despite all of this experience – when I look at this fund menu of 403b investment options below even I can’t figure out what most of these fund choices are!! What the heck is “VEEDOT” or “VALUE”? Prime Money Market sounds good but Premium Money Market sounds even better. What about Global Gold – is that better than cheap old US Gold?

My point here is this. If someone with almost 2 decades of in-the-trenches investment advisory experience can’t tell what the heck some of these 401k options are – why in the world would we expect the average person to be able to decipher these choices? Don’t forget, their future ability to retire will largely rest on the performance of their retirement savings. With all of this at stake – THIS mess is the best we can do for the Baltimore Public School employees on how to choose 401k investments!

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Performing Surgery on Yourself

Many hundreds of years ago it was quickly determined that performing surgery on yourself wasn’t the most practical idea. (Remember as a kid when you tried to rub your belly with one hand while patting your head with the other? Now imagine doing that with a razor sharp surgical stone in one hand.) As a result the profession of Doctor was invented. At first, they might have been referred to as the village medicine man, but I think you get the picture.

It has been 40 years since the 401k was introduced and we are still asking retirement savers to effectively “operate on themselves” when it comes to managing their 401k balances. So far, most self-help solutions focus on providing more and more retirement planning tools, calculators and general education. This is like believing that if we can just produce a better manual or surgical scalpel, then finally people will be able to perform their own open-heart surgeries.

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Which 401k Investor Are You?

  1. The DIY investor enjoys researching investment options and in their free time can be found reading investing articles from The Wall Street Journal, Barron’s, Yahoo Finance, etc. This person may believe that paying someone for investment advice is completely counter-intuitive, since they are totally capable of doing it themselves for free. We joke that occasionally, these are the same folks (ahem, Men) who refuse to stop and ask for directions when lost. But that’s another discussion.
  2. You have enough coin to actually get the attention of a qualified professional investment advisor. Maybe you are a bit long in the tooth and have done a good job of saving money. Maybe you got an inheritance at an early age. Or maybe you’re a silicon valley stock-option millionaire. Whatever the case – my guess is that you have at least 6 or 7 figures in your portfolio and have the benefit of working with a qualified (preferably fee-only) investment advisor.
  3. You know you need help because you don’t have the time, desire, or knowledge to attempt to manage your 401k by yourself. You googled “401k help” and found 19 million entries. You have one of those know-it-all brother-in-laws but you just can’t bring yourself to flatter him by asking for his help. As a result, you’ve done your best to invest your 401k, possibly using one of those “one-size-fits-all” Target Date funds in your plan.
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