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:

  1. We have put you in an allocation of stocks and bonds that is appropriate for your specific timeframe to retirement.
  2. We have tried to give you adequate diversification (given the choices in your 401k plan). In other words, we made sure you don’t have “too many of your eggs in too few baskets!”
  3. To the extent we were able to within your 401k plan, we have directed your investments into the lowest cost investments in the asset classes where you needed exposure.
  4. We monitor your allocation. When market conditions and your timeframe to retirement warrants changes, we go in and rebalance your 401k back to the target allocation that we have built.

This is the exact strategy that has our clients sending the compliments into our Client Services Team. There isn’t any other fancy magic happening behind the scenes to your account.  And even though we are based in Kansas, there isn’t any Wizard of Oz behind the curtain pulling levers on your account in secrecy.

We follow a time-tested (somewhat boring) strategy of asset allocation and fee minimization. But here is the catch. This strategy really only works to its fullest when investors give it time and stay the course. In good times AND IN BAD TIMES.

The Hilly Trip Down The Retirement Yellow Brick Road

When the day comes you start to see your 401k balance decline – maybe over a period of several months or possibly an entire year – this does NOT mean that the strategy blooom follows has failed or no longer works. It just means that the stock market is down, like it is periodically expected to do.

Same can be said for the tremendous returns many are seeing today. Our clients who are enjoying great performance should NOT attribute the blooom strategy as THE REASON behind this performance. It just means that the stock market has trended up these past few years. Then, it will drop. Then, it will go back up.

We should expect the retirement yellow brick road to be a series of hills, not necessarily rolling, but sometimes with sudden descents and rapid climbs.

* Assumes S&P 500 Dividends reinvested. S&P 500 returns from Sept. 24, 2014, through Oct. 9, 2017: http://quotes.morningstar.com/indexquote/quote.html?t=SPX&region=usa&culture=en-US

 

Chris Costello

Chris Costello is the CEO and Co-Founder of blooom - one of the nation’s fastest growing robo-advisors aimed at helping millions of underserved retirement savers. Chris has earned the prestigious CERTIFIED FINANCIAL PLANNER™ designation and has been working with individual clients and building portfolio allocations for over two decades.

Prior to blooom he co-founded another investment advisory firm that grew to manage over $500 million for clients. At blooom, Chris leads the company in building innovative financial services to reach a brand new audience of under-served Americans. Blooom has been named one of the world’s most innovative companies by Fast Company, and Chris was selected as “Ten to Watch in 2016" by WealthManagement.

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