INVESTING IS HARD

If all 401(k) investors simply followed the advice of the financial services industry and invested in target date funds, they would earn about 7.0% per year in investment returns. But because most people are confused and fearful about investing, the average worker only earns between 4% and 5% per year. The confusion and fear cause people to invest too conservatively. They don’t invest enough in the stock market, and they invest too much in bonds and guaranteed income funds.

If 401(k) investors put 100% of their money in an S&P 500 index fund, they can expect to earn 9% per year (including dividends) over their working life. And if they follow our Beyond Buy & Hold system, they can expect to earn 12.7% per year in their 401(k).

These differences in investment returns might seem small. But because of the compounding power of these returns over a 40-year working life, the impact on a retirement account is huge.

Here’s a comparison of the value of a 401(k) for the same person earning different investment returns. This person starts contributing to a 401(k) at 26 years of age and makes the same contributions over 40 years. The only difference is the average annual investment returns.

Based on average returns for actual 401(k) investors (5% per year), this 26-year-old is going to end up with only $643,000 in his or her 401(k) account upon reaching age 65. Yet the very same contributions could result in over $4.3 million with a better investing strategy.

Many workers do a good job contributing to a 401(k) but lose millions of dollars by making poor investment decisions. There are many reasons for this.

Complexity

The financial services industry has created lots of confusing and complex investment products that they insist we all should purchase. They’ve also created all manner of fancy investing terms to make it sound like they know what they’re doing. Are they creating all these products and fancy terms to help investors—or to make more money? You probably know the answer to that question.

This complexity is good for the financial services industry business model. If it were simple, we probably wouldn’t need their products and services. They want us to be confused.

Emotions and Beliefs

Most of what we learned at very young ages about money and investing tends to cloud our judgement today. As a child, I heard lots of stories about relatives who either made a fortune investing in the stock market or lost it all in the stock market (or both).

As adults, we hear about people making millions by getting in early on Apple or Amazon or some other successful company. We hear about people making lots of money day trading—and then we stop hearing about people making lots of money day trading. All of these experiences leave us caught between the competing emotions of greed and fear. And that leads to bad investment decisions. Good investing is disciplined investing, not emotional investing.

Lack of Training

I received a degree in economics from an excellent university. So I understood income statements and balance sheets and important financial statistics at an early age. Yet it still took me decades to figure out the right way to invest.

Much of the training and education about investing has been influenced by the financial services industry and is simply not accurate. It’s tough to learn when even the “experts” are often wrong.

Your confusion and uncertainty about investing is not your fault. The 401(k) is a terrific investment vehicle, but we’ve asked the 60 million people who own a 401(k) to manage their own investments without proper training, and amidst the confusion and noise of the financial services industry. Is it surprising, then, that people struggle with their 401(k) investment decisions?

It is my mission to educate investor like you the right way. And it is not that difficult. We focus on the few key principles that you need to understand and we avoid all of the other nonsense. Follow along with the blog posts like this one and read my books and you will become a confident investor in no time.

Stay Disciplined My Friends,

Phil

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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.