This question is the primary concern of most 401K investors. This question creates anxiety in most 401K investors. What is your answer to this question? Does this question stress you out?
You are probably unsure about the answer.
We are not going to be able to provide you with the full answer today, but we want to start you down the path to answering this question and to becoming confident that you will have enough money to retire comfortably.
Here are some reasons why the answer to this big retirement question is such a problem for most people:
Uncertainty about whether they are saving enough.
Uncertainty about whether they are investing their retirement savings properly.
Confusing and conflicting information in the financial services world.
Lack of the proper planning tools.
Uncertainty about how much money they will need in retirement.
Bad investing advice.
Fear of losing their savings in the stock market.
We discuss most of these things regularly in our newsletters and webinars and we will continue to do so in the future. Our entire mission is to help people retire comfortably and to grow their confidence in all these areas.
Today, will focus on the planning tools. We provide more in-depth training on these topics in our Market Signals program, but we want to cover just a few key points today.
Spreadsheets are terrific for creating the forecasts and projections that you will need for retirement planning. There are two spreadsheets that you need for retirement planning:
Projections for your working years up until age 65 or when you plan to retire.
Projections for your retirement years.
This week, we will focus on the first set of projections – your working years. Next week, we will cover the second one – your retirement years. Constructing these projections is not that difficult if you have some basic spreadsheet skills. We produce these plans for free for our Market Signals subscribers.
The information to create the working years projections is as follows:
Current age and expected retirement age.
Current retirement account balance.
Annual retirement account contributions – yours and your employers.
Expected investment returns based on your investing strategy.
Expected annual withdrawals in retirement.
Plugging in all those data elements and creating the formulas will produce a simple spreadsheet with a projected retirement account balance at retirement age.
The first three data elements (age, balance, and contributions) are straightforward. It is the last two (projected investment returns and expected retirement withdrawals) where people struggle the most. This week, we will focus on the critical element of projected investment returns. Next week, we will address the topic of expected retirement withdrawals.
Your expected investment returns can range anywhere from 3% per year up to around 12% per year depending upon your investment strategy.
Most financial advisors do not tie your projected investment returns to your investment strategy. They try to be conservative and tend to use an average return of around 5% to 6%. They do this because of the uncertainty around future results but also to make sure people don’t run out of money when they retire – a good thing.
We believe that it is much better to take the time to develop the most accurate projections for something so important. What is the point if you are not going to use the most accurate information?
Here are the most common types of retirement investors and retirement investment strategies and their expected annual investment returns.
STRATEGY ASSETS EXPECTED RETURNS*
Highly Risk Averse Cash & Bonds only 3% to 4%
Do It Yourself (low risk) A Little bit of everything 5% to 6%
But lots of bonds & cash
Industry Recommended Target date funds 7.5%
Mix of stocks & bonds
Do It Yourself (High risk) Mostly mutual funds 8%
Best Practice 100% S&P Index Fund 9%
Market Signals Index Funds Bull Markets 12.7%
Cash in Bear Markets
*These are average annual returns. Actual returns by year will fluctuate quite a bit but over long periods of time you can expect these average rates of return.
Most 401K investors fall into the first two strategies above – highly risk averse and do-it-yourself low risk. This is why the average annual investment returns for 401K account holders is between 4% and 5% per year.
People would be much better off just putting all of their money in a target date fund or in an S&P 500 index fund. It is simpler and produces better returns. The only drawback is the financial and emotional suffering during stock market collapses. And it is the excessive volatility of the stock market that causes lots of people to choose the conservative investment strategies. But if you hold onto diversified large cap index funds for the long run, you will see much higher returns.
Our Market Signals system invests primarily in large cap index funds like the S&P 500, but it also includes a strategy and system to deal with stock market collapses. It provides similar returns during bull markets, but it performs better in the long run because it avoids big losses during stock market collapses.
Which investment strategy from the list above do you follow? Whatever it is, use the associated annual investment returns in your retirement planning spreadsheets.
Along with when you start to save for retirement and how much you save for retirement, your investment strategy and its associated annual investment return is the biggest factor in determining your security and your comfort in retirement. If you are totally risk averse, you don’t have to fear stock market collapses, but you need to be prepared for very low investment returns (3% to 4% per year). To achieve your financial goals in retirement you will need to save and contribute much more each year to your retirement fund.
Your investment returns for all the other strategies will be much higher. But unless you use the Market Signals system, you will also have to be prepared to suffer terribly during stock market collapses.
The most successful investors invest in the best assets (large cap index funds) and they have a proven strategy/system to deal with major stock market declines (Market Signals).
Next week, we will focus on the retirement years and how much money you will need after you retire.
If you are not already a subscriber to our Market Signals newsletter, click here to learn more.
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.
Updated: Aug 19
Confidence comes mainly from experience and education. To become a confident investor, one needs to understand the realities of investing in the stock market. One needs to understand that the stock market is very irrational in the short term. All markets overreact to both positive and negative news. As long as human beings are involved in the markets, there will be periods of excessive swings in both higher and lower directions. A confident investor understands this and expects this.
You can be a victim of this irrational behavior, or you can use it to your advantage. Our Beyond Buy & Hold system is one way of using excessive market volatility to your advantage.
Becoming a confident and secure investor is a process.
A confident investor:
Is disciplined and unemotional in their investing – they avoid the pull of greed and fear.
Has the right expectations – they don’t expect 20% or 30% annual investment returns and they also don’t settle for measly gains of 5% or 6% per year.
Is not a gambler – they avoid the “no risk – no reward” mantra. They know that big risks can mean big losses and the proper long-term investing strategy results in huge gains.
Has the proper time horizon and is patient – they don’t put any money they might need to spend in the next five years in the stock market. They are only investing for the long-term.
Understands WHY the stock market will always go up in the long term – it is not enough to have the knowledge of the stock market’s long-range performance. To have the right investing conviction, people need to know the reasons behind the performance.
Confident investors have the knowledge that the broader market of large cap stocks will increase by 9% to 10% per year in the long term. Anything is possible in the short-term. Markets could drop by 40% from their current levels and they could increase by 40% from their current levels in the next 12 months. None of that really matters to a confident and secure investor. Confident investors know that they will not be taking their money out in the next several years, so they are only focused on long term results.
How can we be so confident that the stock market will continue to appreciate at a over 9% annual rate out into the future? The answer is because we are so confident that the biggest and best companies in the world will continue to increase their cash flow by 9% per year. The companies in the S&P 500 have produced annual profit increases of 8.7% per year for the last 100 years. Remember that a 9% increase in annual profits is not a stretch for most companies in the long run. At the companies I ran, we never had an annual profit goal of less than 10% above the previous year. Investors demand that from their management teams.
Our entire economy and our entire society are dedicated to ensuring that these companies grow and flourish. Our government depends on the tax revenue they produce. Society depends on the jobs they produce. Investors depend on the profits they produce.
But what if our system collapses? Given our political and societal challenges, this seems like a fair question. It could happen but I would expect any system that follows this one will be dependent upon those companies succeeding. But more importantly, if you are worried about a system-wide collapse, you absolutely need to be following along with our system and approach. We can’t avoid small, short-term losses with our system, but we would get your money out of the stock market long before the major damage would be done to your investments in the event of a systemic collapse.
In summary, to become a confident investor you need to focus on patience, discipline, and knowledge – not because we say so but because we plan to help you learn about the benefits of this approach. This current period of market turbulence is a test for what kind of investor you are. We want to help you pass this test and all future tests.
A confident investor:
Has a sound investing strategy that puts them in the best long-term investments,
Has a strategy that avoids catastrophic losses in major bear markets,
Doesn’t flinch when markets are down,
Doesn’t get too excited when markets rise significantly,
Doesn’t pay attention to the sensational market news of the day,
Doesn’t get swayed by the “fear of missing out” on the next big investment vehicle,
Focuses only on the long term.
If you are not already a member of our Market Signals membership, click here to learn more.
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.
SUMMARY:
The 2023 rally in the stock market stalled out last week.
But we are still sitting well above the lows reached in October of 2022 and are still close to the all-time highs in the S&P 500.
Small cap stocks have not rebounded as much and are still well below their all-time highs.
The major stories are still the same – interest rates, inflation, and recession concerns.
Recent trends in interest rates are not positive for the stock market.
The trend in interest rates and the fact that stocks are approaching a key resistance level (all-time highs) we can expect a lot more volatility in the markets in the short term.
At nineteen months into this bear market of 2022/2023, it is a good time to step back and get some perspective. 2023 has been a good year for both the S&P 500 and the Nasdaq. As of the market close on Friday August 4th, the S&P 500 is only down about 6% from its previous peak at the start of the 2022. The Nasdaq is down about 12% from its all-time high and the Russell 2000 is still down around 20%. In the graph below, you can see the nice bounce off of the October 2022 lows and the slight reversal last week.
The stock market decline last week (7/31 to 8/4) was all about interest rate fears. The rating agency, Fitch, downgraded the credit rating of the United States. This is very unusual and hasn’t happened in a long time. They raised concerns about political disfunction and the inability of the government to deal with government debt among other things. Downgrades like this result in higher interest rates on government bonds.
This bear market has been driven by inflationary pressures and its resultant impact on interest rates. While the Fed seems to be nearing the end of its rate raising cycle, the debt downgrade has introduced another factor into the interest rate outlook.
A nice way to track bonds and interest rate trends is by looking at bond prices. Remember that bond prices move in the opposite direction of interest rates. When interest rates rise, bond prices go down and vice versa. And the cleanest way to track bond prices is by looking at zero coupon bonds. Since zero coupon bonds don’t pay any interest, the total return on these bonds is reflected in the price of those bonds. We use the symbol ZROZ to track bond prices.
In this first chart of the price for ZROZ, you can see the deep and steady decline of bond prices since the start of the stock market decline at the beginning of 2022. While the price for ZROZ seemed to bottom in October of 2022 like the stock market, its rebound has stalled out. ZROZ is still down about 50% from the end of 2021.
Let’s take a closer look at the price of ZROZ since the end of 2022. From the bottom in October of 2022, ZROZ climbed quickly from $80 to almost $100 in December of 2022. And since the beginning of April 2023, ZROZ has declined steadily back to the lows of October of 2022. Again, this is due to the upward pressure on interest rates (the Fed, inflation, debt downgrade).
The stock market rebound continues to be dependent upon the trend in interest rates. If rates continue to climb, stock prices will suffer. The bond market is currently experiencing the largest short position ever. This means that hedge funds and other traders believe that interest rates will continue to rise and bond prices will continue to drop. This also signals more price volatility in both stocks and bonds.
The reality is that no one knows if the worst is over or not. The last time there was such a high short position in bonds, bond prices and stock prices increased. Because of the uncertainty, it is important to follow a disciplined approach to investing. Followers of our Market Signals newsletter are positioned to benefit if the market keeps moving higher and will be able to limit losses if the market turns down from here. It is critical to have an investing strategy that wins no matter which way the market moves. No one can predict which way things will move in the short term. But we all know that in the long term, the direction of the stock market will be higher. Stay disciplined, my friends.
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.
%20(1).png)
