Many companies now make financial advisors available to their employees to assist with 401K investing. Many of you have also sought out the services of financial advisors on your own for investing help. Our best customers have typically hired and fired one or two financial advisors.
Financial advisors are great at financial planning, tax issues, estate planning, insurance and complex financial transactions. But they are not highly skilled investors. They are financial generalists. Yet, they charge a premium price for mediocre investment advice.
Why do I say this?
Financial advisors rely on the “plain vanilla” asset allocation investment method. You can get similar results if you simply put your money in a Target Date fund.
I’ve covered the problems with the asset allocation method in many other posts, but the main problems with this approach are:
1. You will only earn about 6.5% per year on your investments, and
2. It doesn’t protect your savings from big losses in market downturns.
Most financial advisors, particularly the ones you access through your employer, provide a “set it and forget it” investment portfolio. They help you pick the funds and the asset distributions up front. Yet if you hire one of these advisors on your own, you pay them ongoing fees as a percentage of your account balance forever. They will tell you that your portfolio is built to weather all market conditions. Take a look at your results in 2022 to see how that worked out.
Some financial advisors do take a more active approach to managing your portfolio. They will attempt to make adjustments as market conditions change. But the kind of adjustments they make are not effective because they attempt to anticipate future market performance. No one can do this. No one has a crystal ball to predict which asset classes will perform better in the future. It sounds good but it doesn’t work.
They can’t match the performance of a basic S&P 500 index fund. All of the industry research bears this out. You’ll earn 9% to 10% per year in an S&P index fund and you’ll only earn 6% to 7% per year with your advisor’s approach. You don’t pay any management fees when you buy index funds.
Most of this issue has been created by the SEC regulations for investment professionals. It is not the fault of the advisors. Strangely, financial advisors are not able to compete based on their investment results – the thing you are paying them for. The regulations make it difficult for financial advisors to even talk about their results.
As you know by now, we recommend the index fund approach to investing. But we do not recommend a “set it and forget it” investing strategy. Market conditions do change. We do not recommend that you simply Buy & Hold & Suffer through stock market collapses.
We do not attempt to predict market dynamics in the future. But certain market cycles call for different index funds. And we feel that it is imperative that all investors have a proven system in place to navigate through difficult bear markets where stocks can lose 40% to 50% of their value.
You should definitely seek out professional financial advisors for all of you other financial matters, but you can save yourself a lot of money and get better investment results without their investing advice.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
Is a stock market crash coming?
A lot of people are either concerned about a big drop in the stock market or predicting a big decline. What does the data say?
There is no question that the stock market has been on an impressive run for the last 18 months. The table below shows the gains of the S&P 500 index for the last 18 months, the last 5 years and the last four decades.
Since the long-term average growth of the S&P 500 is about 10% per year, the stock market tends to correct itself with big declines after periods of above average performance. The 1980s and 1990s saw very high growth rates in the S&P 500 only to be followed by two crashes in the decade of the 2000s.
The market has been on a tear since 2010 with average annual growth of 15% per year. In the first four years of this decade (2020s), the market has grown by 13.4% per year despite the fact that we have had two bear market collapses in those four years.
Our proprietary Market Valuation Indicator (MVI) suggests that the S&P 500 is currently overvalued by about 6%. In early 2020, the MVI showed that the S&P 500 was overvalued by about 16%. In then proceeded to drop by 25% in the next ten months.
It is likely that we are due for a pullback in the markets. But will it be a minor correction or a big decline? And when might it occur?
Unfortunately, no one can answer these questions with any certainty. The market is fickle and irrational.
So, what is an investor to do?
The worst thing you could do is to sell stocks out of a general concern. Relying on intuition or guessing never works in the stock market. Also, the biggest gains in growing markets happen at the tail end of the cycle.
Most of you know that we recommend a disciplined investing approach. And it is important to stay disciplined now and at all times.
All successful investors need a methodical system or approach that provides above-average growth AND protection against market collapses. Our Beyond Buy & Hold system is built to give investors both of these things. It allows investors to be aggressively invested in the stock market BECAUSE it includes an automated approach to get out of the stock market when the risk of collapse is high.
If you don’t have a safety mechanism like this to protect your retirement accounts from suffering major losses, you are jumping out of a plane without a parachute. Or to use another analogy, you are walking on a tight rope without a net.
Why would you risk your life savings this way?
If you want to learn how to protect your investments this way, sign up for a free consultation below. Let us show you how easy it is to get higher growth AND protect your money against big losses.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
The average customer for our Market Signals investing service tells us a lot about our service and the investing journey for more sophisticated investors. Look at the highlights in the table below.
Here is what I take away from this data.
Our typical customer has been investing and managing their 401K for many years. At 49 years of age, they are not 401K rookies.
They have done a good job with their retirement accounts before they came to us for help. Their account balances are about double the average for their age.
Their previous investment returns were not bad but not great either. For the most part, they have followed the industry advice and have used a balanced or Target Date fund approach. As a result, they have been getting annual investment returns of between 6% and 7% per year.
Their investing knowledge and their investing experience are definitely above average. Most have worked with more than one investment advisor previously. This is why they have been getting the “best” that industry has to offer with 6.5% investment returns.
The most sophisticated investors recognize the tremendous benefits from our approach but the less knowledgeable investors need our services more.
The other characteristic that I observe when talking to our customers and FIXING THEIR 401K is that they are frustrated. They know that they can and should be doing better with their 401K investments even though their balances are above average for their age. They are frustrated watching their accounts grow by 6.5% while the S&P 500 index funds grow by 10%.
They are frustrated with the big losses they have absorbed during stock market collapses. Their investment advisors told them that their balance portfolios (asset allocation method) would protect their savings during bear market but that has not been the case.
I love all of our customers and I am very pleased to be helping them achieve the results that they deserve. But I must admit that it is a bit frustrating to have to wait for people to learn painful investing lessons over decades before they seek out a better solution with us.
Unfortunately, people need to learn from the school of hard knocks (sometimes for ten years or more) before they realize they need a better or different approach. I guess it is human nature. Those of you with children are well aware of this phenomenon. People have to learn life’s painful lessons on their own most of the time.
The frustrating part for me is that the sooner that people figure this out, the better off they will be. My dream is to be able to help younger people get the benefits of a better investing approach. The power of time and the power of compounding is in their favor.
Where are you on your investing journey? How many more mistakes do you need to make before you realize you need a better way? Hopefully, you won’t struggle for another decade or more.
If you want to make changes and FIX YOUR 401K sooner rather than later, schedule a consultation by clicking the link below.
Happy Investing,
Phil
Disclaimers The Beyond Buy & Hold newsletter is published and provided for informational and entertainment purposes only. We are not advising, and will not advise you personally, concerning the nature, potential, value, or suitability of any particular security, portfolio of securities, transaction, investment strategy or other matter. Beyond Buy & Hold recommends you consult a licensed or registered professional before making any investment decision.
Investing in the financial products discussed in the Newsletter involves risk. Trading in such securities can result in immediate and substantial losses of the capital invested. Past performance is not necessarily indicative of future results. Actual results will vary widely given a variety of factors such as experience, skill, risk mitigation practices, and market dynamics.
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