Category : 401k

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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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 sitting 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. Before I begin, let me explain what a Target Date Fund is, or is intended to be.

Target Date Funds were meant to make investing for a specific date in the future – like Retirement – a simpler process. 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 handful of 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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The Royals and your 401(k): What the AL champs and MLB can teach us about Investing

“The future ain’t what it used to be” – Yogi Berra, New York Yankee Legend

Like many kids, I learned from an early age that a game can teach us more about life than most realize. Baseball is adversity. Baseball is success by way of failure. Baseball is discipline and perseverance. Sounds a lot like life doesn’t it? Or dare I say…investing?

For decades, one of the biggest complaints with Major League Baseball has been the wealth gap between small and big market teams. Teams in bigger markets have more money. More money equals better players. Better players equal more championships. The little guys start every single season at a disadvantage. While that may have been true over the last few decades, times are changing. And it’s no fluke.

In 9 of the last 10 years, at least half of all playoff teams fell in the bottom half of all MLB payrolls. In the 10 years prior, that only happened 3 times. Both World Series teams have proven that it doesn’t take a fat wallet to have success anymore.

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Is Your 401k About To Hit A 20 Car Pileup?

So, I’m driving home from work and traffic is awful. I’m late, I’m flustered and even worse…I’m impatient.

BUT I’m certain that I can shrink down my commute time if I can correctly pick which lane of traffic to maneuver in and out of. I daftly survey the type of cars in front of me; a minivan, a semi-truck and a package delivery truck. There is no way these vehicles are going to move fast and I’m certain the other lanes of traffic will get me to my destination quicker. As I look to my left, cars are whizzing by and moving at a much greater speed (ie, performing way better). After “researching” my lane, I decide that it’s bad and I need to get out of it.

I see my opportunity and pull into the faster lane on my left, just as the lane comes to a screeching halt. To add insult to injury, the lane I was just in starts to move forward. After a three second analysis I decide that I blew it – time to reassess. On a hunch, I think that there might be a wreck in my lane just around the corner. Looking back at the lane of traffic I was just in, I can see the cars are still flying by me. Decision time! Instinctively, I hop back into my original lane. And as luck would have it, it comes to a standstill.

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Koozie’s Won’t Lead You to the 401k Promised Land

Before I got into finance 18 years ago, I started my career in advertising and I’ll never forget my first 401k investment meeting.

I was at my first job; a co-worker popped his head into my cubicle and asked if I was going to the 401k meeting. What 401k meeting? What is a 401k? So I went. A guy in a $2000 three-piece suit stood in front of about 100 of us and explained after-tax saving, pre-tax saving, asset allocation and tossed in a few indecipherable charts and some very colorful diagrams. As I surveyed the room, 80% of the folks were squinting and nodding – but the kind of nodding where you know they have no clue what he was saying. Another 10% were paying zero attention. And the final 10% seemed to be tracking quite well (I might add they were all from the finance department). Then came the question and answer session. I had a thousand questions…but there was no way I was going to raise my hand. I didn’t want to look like a fool and ask a stupid question about 401k investment advice. I imagine my co-workers felt the same.

I left the meeting with a binder, a koozie with a financial firm’s logo on it, and a pile of questions.

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