401k Investing for Newbies and Nerds
There are 90 million American workers who have collectively own $14 trillion in their 401k accounts. They face both challenges and opportunities. The largest opportunity is that their accounts are investment accounts, not savings accounts, and for the past three decades, many have grown their balances in the low double digit range. Those with the highest return have constructed portfolios that focus on index funds and avoided target date funds.
The main challenge 401k owners face is that there are required to make their investment decisions by choosing from a limited menu of mutual funds. 42% of 401k participants have found that including index funds in their portfolio has provided them with results that optimize their investment experience.
The 90 million 401k account owners can be divided into 3 categories. The first are those who could care less about their money and are willing to just take what they are given. The second group, NEWBIES, are inexperienced in the investment process, but are willing to become engaged in the management of their hard-earned dollars. The third group, NERDS, are those who have a modicum of investment expertise and are willing to devote the time and energy to expand their investments skills.
My mission is to motivate 401k participants and their employer plan providers to become engaged in their account and then train them how to optimize their results.
I have a 62-years of stock market experience. I have been a stockbroker, finance professor and individual investor. I have no investment products to sell. All I have to offer are the objective observations of one who has been there and done that.
401k Investing for Newbies and Nerds
Season 2 Episode 10 Is Your 401k Up to Par, The First Tee
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I recently attended a charity fund raiser. After signing in, I took my assigned seat, and soon afterwards my table mate arrived. We exchanged the required pleasantries, and the conversation quickly turned to golf. She explained to me that she had taken dozens of expensive golf lessons with a local golf pro to improve her handicap but had not been able to get into the single didge range. Then a fellow golfer suggested a free online video and two months later her handicap plummeted to 7. (For those of you non golfers, a handicap of 0 means your average score is par. A handicap of 15 means your average score is 15 strokes more than par)
The discussion then turned to turned to a topic closer to my wheelhouse: 401ks. My table mate explained to me that she had a similar experience with their 401k. For several years, she felt her account was doing poorly. Then a co-worker told her about a red-hot mutual fund. She bought a bunch of it and suddenly her returns dramatically improved.
You will notice in the case of her golf handicap, there was a great deal of specificity. She knew exactly what her handicapped was before and after the video. She had a precise number for her desired score. But as I quizzed her about her 401k’s performance, she failed to produce exact numbers, just vague generalities and feelings. She had no clue as to how the market had performed for the past several years or for that matter what was an acceptable rate of return, given her limited 401k options.
As the conversation continued, I became befuddled by the fact that a person in her position knew so much about her golf score and so little about the performance of her greatest financial asset. Having spent five decades of my life talking to people about their finances, I also realized that this was not in a one off situation.
This Episode is the first in a long series of discussions on how to evaluate your 401k results and help you build a 401k portfolio that makes sure that
YOUR 401k IS A GIFT THE KEEPS ON GIVING.