mint.com— Target-date funds would be great if fund managers could foresee the future. But because they can't, the actual returns from these products may be disappointing for many investors.
Apr 2, 2010View in Crawl 4
You DO know that you can rollover your 401(k)s from previous employers into one IRA, right? Just open a Rollover IRA with your banks, contact the plans from your previous employers, and have all of them rolled over into one account.Also, if you're putting your money under a mattress instead of a 401(k), you're probably losing out on free money if your employer has a matching percentage, which most do.And puck is right - every 401(k) I've ever had let you direct how the money is invested, though sometimes the options are a little more limited.
Or you can use a bond index and an SP500 index and move it yourself and save the fee. Those fees accumulated over 45 years will take away half of your money by the time you retire. Heck you can just go 100% into the SP500 and you'll do better even if the market drops 50% the year of your retirement because you avoid paying high management fees. A 1.5% fee will eat away about 1/2 of your portfolio over 45 years.Jack Bogle and others have proved that historically over a 15 year period 94% or so of mutual funds underperform the SP500 because of management fees eating away (all the funds as a whole must perform average, but they charge fees so more funds perform below the SP500/DOW averages) at returns. Over a 40 year period, more than 99% of mutual funds under perform the index.
Problem is how do you know what is risky and what is not risky if you don't take the time to learn about investing yourself. Lots of people think that bonds are less risky than stocks, but that is not true. Virtually all the legendary investors, including Warren Buffett, have publicly stated that bonds are going to be a terrible investment over the next decade, but retail investors have more than 95% of their money in bond funds. Bonds are less volatile, but when you lock in very low rates of return at historically low interest rates while the government is printing an unprecedented amount of money, you're probably going to get killed by inflation. The best case scenario is that no inflation happens and these retail investors get a 3-4% return on their bonds. The worst case scenario is that inflation happens and these retail investors locked in a rate that is below inflation for an extended period of time and when they get their money back they cannot retire because the money doesn't buy as much stuff any more. There have been multi year/decade period where bonds outperformed stocks (ex: the last 10 years, Great Depression, etc) and there have been multi year/decade periods where bonds failed to protect purchasing power (even without any defaults).Following the old formula of rebalancing a stock index and a bond index with a bias towards stocks when you are young and bonds when you are old works pretty well if you are intent on not learning how to actively manage your money. But it is far from fool proof. One of the dangers is when a large number of people are doing the same thing, i.e. many boomers aging and retiring near the same time, is that you may end up with a time where way too many people has 80-90% bonds with 20-10% stock, and then you have a massive bubble in the bond market. That describes the situation we are in now as something like 95% of retail money is in bond funds. It doesn't look very pretty.
cyberdroppingApr 3, 2010
You better wake up and smell the coffee mikemil828- there is legal action about to take place against these bloodsucking kplan admins and it is about damn time. read it and weep<a class="user" href="http://www.velaw.com/resources/UpcomingExplosionHiddenFeeLitigation.aspx" rel="nofollow">http://www.velaw.com/resources/UpcomingExplosionHi ...</a>
finsternisApr 3, 2010
You DO know that you can rollover your 401(k)s from previous employers into one IRA, right? Just open a Rollover IRA with your banks, contact the plans from your previous employers, and have all of them rolled over into one account.Also, if you're putting your money under a mattress instead of a 401(k), you're probably losing out on free money if your employer has a matching percentage, which most do.And puck is right - every 401(k) I've ever had let you direct how the money is invested, though sometimes the options are a little more limited.
noblepaladinApr 4, 2010
Or you can use a bond index and an SP500 index and move it yourself and save the fee. Those fees accumulated over 45 years will take away half of your money by the time you retire. Heck you can just go 100% into the SP500 and you'll do better even if the market drops 50% the year of your retirement because you avoid paying high management fees. A 1.5% fee will eat away about 1/2 of your portfolio over 45 years.Jack Bogle and others have proved that historically over a 15 year period 94% or so of mutual funds underperform the SP500 because of management fees eating away (all the funds as a whole must perform average, but they charge fees so more funds perform below the SP500/DOW averages) at returns. Over a 40 year period, more than 99% of mutual funds under perform the index.
noblepaladinApr 4, 2010
Problem is how do you know what is risky and what is not risky if you don't take the time to learn about investing yourself. Lots of people think that bonds are less risky than stocks, but that is not true. Virtually all the legendary investors, including Warren Buffett, have publicly stated that bonds are going to be a terrible investment over the next decade, but retail investors have more than 95% of their money in bond funds. Bonds are less volatile, but when you lock in very low rates of return at historically low interest rates while the government is printing an unprecedented amount of money, you're probably going to get killed by inflation. The best case scenario is that no inflation happens and these retail investors get a 3-4% return on their bonds. The worst case scenario is that inflation happens and these retail investors locked in a rate that is below inflation for an extended period of time and when they get their money back they cannot retire because the money doesn't buy as much stuff any more. There have been multi year/decade period where bonds outperformed stocks (ex: the last 10 years, Great Depression, etc) and there have been multi year/decade periods where bonds failed to protect purchasing power (even without any defaults).Following the old formula of rebalancing a stock index and a bond index with a bias towards stocks when you are young and bonds when you are old works pretty well if you are intent on not learning how to actively manage your money. But it is far from fool proof. One of the dangers is when a large number of people are doing the same thing, i.e. many boomers aging and retiring near the same time, is that you may end up with a time where way too many people has 80-90% bonds with 20-10% stock, and then you have a massive bubble in the bond market. That describes the situation we are in now as something like 95% of retail money is in bond funds. It doesn't look very pretty.
wolfmannApr 5, 2010
I guess I'm lucky and have a TSP L fund that only charges 0.028% for administrative costs.
varkeerApr 6, 2010
KISS :P keep those fees low! start young and never stop investing :)