SUMMARY:
Your investment results are well below what a VERY GOOD 401K investor produces.
Yet you are also not getting much loss protection from your supposedly “safer” strategy.
Even though the VERY GOOD 401K investor generates higher returns, they also get clobbered in bear market crashes.
Imagine if you could get the better results of the VERY GOOD investor AND keep your money protected from the huge losses associated with stock market collapses?
How would that feel?
NOTE: For your results, I am using the data from a Fidelity Target Date fund that has a 70% allocation to stocks and a 30% allocation to bonds. The long-term return rate of this fund is 6.4% per year. The average 401K investor only generates returns of about 5% per year. I have found that people seeking my help are doing better than average but still underperforming (generating returns of between 6% and 7% per year).
This chart compares the results for the VERY GOOD 401K investor to your results over the last 16 years. I use 16 years because that is the extent of the history for Target Date funds. Your average annual investment gains are around 6.4% (Target Date fund results). A VERY GOOD 401K investor would have posted annual investment returns of 10.4% per year over the same time period. The only difference between you and the VERY GOOD investor is that they make better fund selections. They only invest in US large cap stock index funds.
The investment industry tells you that the lower returns are worth it because the balanced approach is less volatile and that it cushions your losses during bear market crashes. But how does it do as far as limiting your losses?
Let’s look at graphs of the last two prolonged bear markets in 2008 and 2022. Here we will compare how a VERY GOOD 401K investor did in those downturns compared to your results (same Target Date fund). The lines look very similar, don’t they? There are just a few months where your losses were slightly less than the VERY GOOD investor. This clearly shows that your balanced and “less risky” approach to investing is significantly lowering the growth of your retirement account and it is providing very little downside protection.
The VERY GOOD investor does get crushed in these bear markets – down about 25% in 2022 and down almost 50% in 2008. These scary declines that come from the Buy & Hold strategy are just awful to live through. Our Beyond Buy & Hold system was developed to address this avoidable pain.
The next two graphs are the same as the previous ones only I have added the grey line which represents what the VERY GOOD investor would have produced if they had used our MARKET SIGNALS system that protects against losses in bear markets. Our MARKET SIGNALS system IS designed to limit losses. By limiting the losses, you end up making more money.
The MARKET SIGNALS investor generates another 2% to 3% per year in average annual investment returns compared to the VERY GOOD investor because they lose less money in downturns. Our system uses the same large cap index funds as the VERY GOOD 401K investor. But MARKET SIGNALS tells you exactly when to get out of the market and exactly when to get back into the market during the scary times.
Because MARKET SIGNALS alerts you when to get out, it dramatically reduces the anxiety associated with stock market investing. You can sleep easy at night knowing that your savings will be protected in the event of a market collapse which can appear at any time and for any reason in the highly irrational stock market.
Click the link to learn more about MARKET SIGNALS and what it can do for your retirement.
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.
For those of you who struggle with deciding upon which funds to choose for your 401K, I will be reviewing all of the different categories of funds available to 401K investors. Today, I will be focusing on one of the common 401k investing options - bond funds.
Bond funds invest in individual bonds. Bonds are debt instruments or loans. These loans are typically issued by governments or corporations. Bonds carry a fixed interest rate and a specific term.
A 10-year treasury bond issued by the federal government currently pays 4.1% interest and the term would have a ten year term. 10-year corporate bonds issued by specific companies currently pay around 5.1% in interest. Corporate bonds are graded based on the quality of the issuing company. Lower rated bonds pay higher interest rates.
A bond fund typically invests in hundreds of individual bonds just like a stock fund might own hundreds of individual stocks.
Bond funds often have a particular strategy that dictates the kinds of bonds they invest in. For example, some bond funds only invest in short-term bonds (less than one year in duration) or long-term bonds (ten year plus durations). Some bond funds only invest in government bonds. Some bond funds only invest in high quality corporate bonds.
Bonds or fixed income assets are supposed to provide a predictable return and a measure of safety. The main reason to be in “safe” assets (cash, money market funds, bonds, etc.) is due to the risk of losing money in other asset classes like stocks and commodities.
Since the stock market always has a risk of losing value in the short term, you are advised by the investment industry to keep a portion of your long-term investments in bonds or fixed income products. One problem with that approach is that bonds can and do lose money. In 2022, bonds lost roughly 15% of their value due to an increase in interest rates. When interest rates rise, the value of bonds go down.
Bonds did provide some protection against losses in the dot-com crash in 2001, but they did not provide any protection in the financial collapse of 2008 or in 2022. So using bonds as a measure of safety only worked in one of the last three prolonged bear markets.
Bonds always underperform stocks in bull markets. From 2012 through 2021, the S&P 500 grew by an average of 15.7% per year while the typical bond fund only generated average annual returns of about 3% per year. Every dollar invested in bonds cost you dearly.
The table below will show you why I am not a fan of people owning bonds in their 401K or IRA. The best stock index funds like the ones shown below will outperform bonds over the long-term. Every dollar invested in bonds will cost you anywhere from 6% to 10% per year over your working life. These lower returns will dramatically decrease your retirement nest egg.
There are some special situations where bonds make sense. If you are in retirement or near retirement, bonds should be a part of your portfolio.
If you have bonds or target date funds in your 401K account right now, we can show you exactly how to reposition your investments to rescue your retirement. Email me at phil@beyondbuyhold.com with a subject line of “401K Instant Fix” and we’ll get you straightened out immediately.
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.
Do you notice how much conflicting investment information there is out there?
Here are some of the varying points of view that we all come across daily:
You should own bonds because they are safer.
Don’t buy bonds because they offer low investment returns and they can lose money like they did in 2022.
Don’t buy funds. The only way to make money in the stock market is to get in early on companies like Amazon and Apple.
Don’t buy individual stocks because even the best fund managers in the world can’t beat the index funds.
Buy international stock funds because the economies in places like India and South America will grow faster than the US economy in the coming decades.
Don’t buy international stocks because their returns are less than half those of the US index funds.
We will get a “soft landing” in 2024 and it will be a big year for stocks.
The US economy will be going into a recession in 2024 and stocks will decline by 30% or more as a result.
I could keep going and going with this list. It seems that no one can agree on anything about investing or the economy.
Why is this the case and, more importantly, what is the average investor supposed to do with all this conflicting information?
There are several reasons why all these contradictions exist.
Nobody can predict the future with any accuracy or consistency. It is just too hard to predict asset prices and the economy. There are too many things (known and unknown) that affect financial markets.
Often, the people who predict things just do it for media attention. Bold and dire predictions get the most clicks and the most views. Look for hidden agendas.
When it comes to investing guidance, people are relying on different facts or theories. And some of those theories are driven by the interests of the investment industry and not the interests of the investor.
I know that all of this stuff can be frustrating and confusing. Investing is hard enough as it is without all of this noise.
Because the investing world is so messy and full of conflicting information, it is important for you to:
Ignore short-term forecasts of things that are too hard to predict like the direction of the stock market, the direction of the economy, the direction of interest rates, etc. Since investing is a long-term game, this is fine. Stay focused on long-term data and data that is consistent.
Understand the data and the facts behind the advice. Is it just an opinion that is grabbing a bunch of facts to support their opinion? Or is the advice driven by sound and consistent data and logic that have held up for 30 years or 50 years or more?
Understand the motivation of the forecaster or expert. Are they committed to truth and logic or are they going to benefit financially if you believe their assertion. The Asset Allocation model based on risk-profiling is the financial lifeblood of the investment services industry. If you believe in their model, then you will need their services and you will pay their fees to help you manage your investments.
I, too, benefit when people buy my products and services. But I can sincerely tell you that I am only doing this because in my decades of investing experience that I have not found any approach to investing that works nearly as well as my system. It is not perfect, just better. I invest all my own money according to my Beyond Buy & Hold system. I invest all my hedge fund client’s money the same way. If I could have found an investing approach that is this good, I would have gladly let someone else do it for me. I love helping people achieve the comfortable and secure retirement that they deserve.
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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