Part 5 of our “Target-Date Investing: Ten Investment Mistakes Wall Street Hopes You Make” series. (You can find all of our Target-Date Funds articles here.)
“Usually, one would expect a retail product in a fast-growing, $500 billion market to have a great reputation among the consumers buying the product and the professionals who provide, recommend and sell it. The odd thing here is that its growth may be largely attributable to ignorance.”
-Robert, Boslego, Boslego Risk Services, in guest column for Riabiz.com on target-date funds.
Mistake #9: Base your investment strategy on false assumptions.
Target-based funds (and most mutual funds) are built on false, inaccurate and costly assumptions. For instance, let’s look at the faulty suppositions that relate to the first 8 mistakes we’ve covered so far in this series on “Target Date Investing: Ten Investment Mistakes Wall Street Hopes You Make.” Are you basing your investment strategy on these dangerous assumptions?
- The best place for your money is in someone else’s hands. Don’t try to manage or control your own money, or even keep it liquid.
- You don’t need financial advice, just a one-size fits all fund. (Since finances are so complicated, it’s really best to delegate or even avoid decision-making.)
- Salespeople and administrators with little-to-no training in retirement planning can give you appropriate financial advice.
- Advisors and fund managers who don’t operate from the fiduciary platform will surely keep your best interests in mind.
- It’s not a big deal to pay extra fees to pay for expenses of the funds-within-the-fund or for revenue sharing. (Never mind that the fees can add up to six figure losses.)
- Go ahead and leave your money in a target-date fund after you retire, even though the fees will continue to erode your savings while subjecting your retirement funds to losses.
- Target-date funds will give you all the diversification you need to protect yourself from market instabilities.
- You should always manage for growth over safety, even up to and past retirement. If you don’t, you’ll surely outlive your money!
But the false assumptions don’t stop there… they go even deeper… providing the very foundation for the beliefs that have led to our failed 401(k) system.
Target-date funds now hold over half a trillion dollars of American investor’s retirement funds. But do they lead investors out of Wall Street dangers, or only deeper into the fray? Let’s take a look at the assumptions TDF’s are based on, and the false beliefs that they reinforce:
Stocks provide the best investment vehicle for growth.
FALSE: According to extensive quantitative analysis by Dalbar, Inc. com on investor behavior, investors underperform the market – always. For the twenty years ending 12/31/2010, the S&P 500 Index averaged 9.14% a year. However, the average equity fund investor earned a market return of only 3.83%. This discrepancy between averages and returns is due to factors such as fees, taxes, investor behavior, and the difference between average and real returns.
Mutual funds are the safest place for your money, because they keep you invested in many different stocks.
FALSE: The only real safety that mutual funds provide is to protect investors from investing large percentages of their portfolio in a company that goes belly up, as happened to many in the Enron scandal. Beyond that, in a stock market crash or even simply a bear market, being “diversified” in 1,000 different plummeting stocks will not save you from tremendous losses.
The stock market is the best place for the bulk of a person’s investments.
FALSE: Your broker would love you to think that wealthy people got that way by simply putting money into their brokerage account every month. But the truth is that most self-made millionaires are OWNERS – owners of businesses, owners of real estate, owners of intellectual property. Look at the list of the world’s richest men. Few have made their fortunes through investing in the stock market.
With the rise of high-frequency speed trading, derivatives, and Wall Street volatility, many savvy investors (including billionaires) are opting out of the stock market altogether. They have discovered better and more consistent returns by investing in alternative investment vehicles such as life settlements, investment real estate, business (through traditional means and partnerships, or even peer lending platforms), tax lien certificates, or private loans secured by real estate. Even whole life insurance (more of a place to store cash than an investment vehicle), can be a preferred alternative to the market roller coaster.,
Risk and growth are mutually exclusive, and you must choose between one or the other, or a balance of both.
FALSE: Risk assessment profiles (we hate ’em) that help you determine if you are a “conservative,” “moderate,” or “aggressive” investor are a not-so-subtle tools to condition the investing public to believe that a 10% or 20%+ drop is “acceptable,” even normal, as long as the investments eventually bounce back. We believe a better strategy is to look outside the stock market for investments that offer reasonable security of principle along with steady (even potentially lucrative) returns.
Target-date funds largely try to “balance” risk and growth by adjusting asset allocations between stocks and bonds, but this strategy has not proven effective. Target-date funds consistently underperform the market, while offering no guarantees against loss. During our recent bull market, the bonds, REIT’s and “stable” income funds experienced significant drops, dragging down fund performance.
The “accumulation and disbursement” model is sound and the only investment model you need for retirement.
FALSE: We think the accumulation and disbursement model is lacking, inefficient, and even dangerous. Even the very words “accumulation” and “disbursement” set up investors to think about their retirement as a two-step process of saving and investing money, then spending the money they have saved. There are several big problems with this thinking.
First, it’s unsustainable. What if you’ve saved enough for 20 years, but you live 30 years beyond retirement? In Rich Dad, Poor Dad, Robert Kiyosaki put forward a much better idea: buy income-producing assets rather than (or in addition to) paper investments. Similarly Partners for Prosperity Inc.’s 7 Principles of Prosperity advice investors to focus on Cash Flow, not Net Worth. And you don’t have to wait until retirement or any other arbitrary age or date to focus on cash flow. (We recommend that you don’t wait!)
Second, it’s stressful. The fear of “running out of money” is consistently named the top fear of seniors and those approaching retirement. Who can enjoy life worrying if the vacation you take at age 70 means you’ll be destitute at 85? When your financial strategy focuses on cash flow rather than accumulation, you can focus on “living within your means” instead of worrying about “running out of money” while your money pile dwindles.
Third, it’s expensive. As long as Americans think in terms of “accumulation and disbursement,” many remain dependent on Wall Street managers, mutual funds, 401(k)s, and other failed experiments. We give up control of our money while subjecting our savings to ongoing fees and risks. A recent study published by Demos.org, “The Retirement Savings Drain,” showed the average American family is losing $155k to fees and expenses by retirement age alone.
The real danger in all of these assumptions is that they undermine our ability to save safely and to invest sustainably for ourselves – not in stocks and bonds, but in real assets that create value and produce cash flow.
And there is one more false assumption lurking, and it’s the very concept of “retirement” itself:
The average person can save enough by about age 65 (or some other arbitrary age) to retire and never work again for 20 years.
FALSE: Too many Americans have little or no savings beyond what Social Security will provide, and it’s simply not enough. According to the AARP, investors 55-64 years old have average 401(k) balances of less than $135k. Investors age 65-69 had average balances of $136,800. When you consider that many people have no pensions, Social Security barely provides for subsistence, and that healthcare expenses alone for a couple retiring today are estimated at $240k, you can see why retirement is not realistic for many people.
While many people were able to successfully retire in the day of pensions and shorter life expectancies, this is simply not the case for most Americans today. Even those who feel they have “enough” may be sadly mistaken when escalating medical costs or long-term care add up, not to mention inflation.
It is definitely time to re-think retirement, and this is not necessarily a bad thing! We believe that the idea of “retirement” at 65 is dangerous to most people’s wealth, health, and sense of purpose. Our founder Kim D. H. Butler explores this idea in detail in her latest book, Busting the Retirement Lies. Read it and see how you can have a truly passionate and prosperous life.
Is there a better way? Yes! We invite you to explore the Prosperity Economics alternative to typical financial planning. The strategies and principles of Prosperity Economics get your dollars working harder for you, protects your principle, and allows for greater control, flexibility and cash flow. See our books s to explore further, or schedule a complimentary consultation http://partners4prosperity.com/contact to get started on the Prosperity Pathway.