Your 401k, Your Money and YOU Don’t Give a Sh*%
So you have a steady job and contribute to a 401k. Great! Hopefully you are contributing up to the match, if you have one. The problem with most 401ks is that a lot of the funds are target date funds that get more conservative as they get closer to their target date. And of course the main culprit: FEES.
But let’s start with target date funds. The only target date funds that are the exception are the Vanguard funds.
What is a target date fund? Here is the definition from Investopedia.
Target-Date Fund: A mutual fund in the hybrid category that automatically resets the asset mix of stocks, bonds and cash equivalents in its portfolio according to a selected time frame that is appropriate for a particular investor. A target-date fund is similar to a life-cycle fund except that a target-date fund is structured to address some date in the future, such as retirement.
“For example, a younger worker hoping to retire in 2050 would choose a target-date 2050 fund, while an older worker hoping to retire in 2025 would choose a target-date 2025 fund. Because it has a longer time horizon, the 2050 fund would likely be weighted heavily toward stocks, with a relatively small percentage of bonds and cash equivalents, while the 2025 fund would hold relatively more bonds and cash equivalents and fewer stocks so it would be less volatile and more likely to contain the assets the investor needs to begin making withdrawals in 2025.”
Why do most of these type of funds suck?
Because they have 15–25 actively managed funds in it that you don’t need, you really just need 3 or 4. Lets take a look at what funds are in the John Hancock Retirement Living through 2050:
John Hancock International Core Fund
John Hancock Disciplined Value Fund
John Hancock Health Sciences Fund
John Hancock Global Equity Fund
John Hancock Global Shareholder Yield Fund
John Hancock Natural Resources Fund
John Hancock Absolute Return Currency Fund
John Hancock US Equity Fund
John Hancock International Value Fund
John Hancock Global Absolute Return Strat Fund
John Hancock Fundamental Large Cap Value Fund
John Hancock Mid Value Fund
John Hancock Strategic Growth Fund
John Hancock Capital Appreciation Fund
John Hancock Blue Chip Growth Fund
John Hancock Financial Industries Fund
John Hancock Equity-Income Fund
John Hancock International Small Company Fund
John Hancock International Small Cap Fund
John Hancock Mid Cap Stock Fund
John Hancock Science & Technology Fund
John Hancock Capital Appreciation Value Fund
John Hancock Emerging Markets Fund
John Hancock Alpha Opportunities Fund
John Hancock Strategic Equity Allocation Fund
HOLY SHIIITTTT... Why in God’s name would you need that many funds in your retirement account? All of the funds are actively managed with large turnover rates and high expenses. THE TRIFECTA OF BAD INVESTING! Why does Wall Street do this, to make tons of money of course because they know that the majority of Americans are not paying attention. Are you?
Don’t take my word for it but what would one of the world’s richest people do?
Here is where Warren Buffett is leaving his money when he passes away and it’s not in Berkshire Hathaway. This is what he wrote in his 2013 annual shareholder letter:
My advice to the trustee [of my wife’s assets] could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors — whether pension funds, institutions or individuals — who employ high-fee managers.
Only TWO funds folks. Just TWO. An S&P index fund and short term government bonds. And that’s Warren Buffett, so why are you in 15–25 different funds? Something you should start thinking about right now.
In my earlier post I mentioned that Warren Buffett recommends index funds to the common investor and even for himself. How about for the best basketball player in the world right now? Here is an excerpt from his CNBC interview:
“Warren Buffett isn’t recommending stock picking, real estate or anything complicated to LeBron James.
The billionaire investor essentially advised the multi-millionaire basketball star to keep it simple when James asked him for investing advice on Monday.
“Everybody’s got an idea for him, and usually the simplest is the best,” Buffett said on CNBC during a segment that featured James asking a couple of questions.
The Oracle of Omaha said athletes are often approached with investing ideas tied to restaurants or real estate, but James should buy a low-cost index fund, while also keeping a significant cash reserve — “whatever makes him comfortable.”
“Just making monthly investments in a low-cost index fund makes a lot of sense,” Buffett said.
He added: “Owning a piece of America, a diversified piece, bought over time, held for 30 or 40 years, it’s bound to do well. The income will go up over the years, and there’s really nothing to worry about.”
That is how you should invest too. I know I mentioned 401k since that is the way most people put away money right now but even outside your 401k you should have an index strategy that you contribute to as well. I do it weekly but you can do whatever you are comfortable with and can afford.
Why do FEES matter?
The easiest way to look at your fees in your funds is looking at something called the “expense ratio.” I personally do not want to pay any more than .05% on my stock index funds. I have seen my friends and families 401ks with fees of more than 1% in them. Many people might be thinking, what’s the big deal, its only 1%? Think about it. If you are making 10% on your money every year and my fee is 1% , I am really taking 10% of your profits (1/10 = 10%). Uhh… that’s a lot!
Let me show you using Math
Amount invested: $50,000
Holding period: 30 years
Rate of return: 10%
How much money will you have using a fund with the expense ratio of .05%?
How much money will you have using a fund with the expense ratio of 1%?
The Difference: $214,111
That is a lot of money being taken away in the form of fees and opportunity cost (money that would have been invested but was lost to fees). This is exactly why fees matter. This isn’t my opinion, its just math.
Compound interest is great and it works but you have to watch out for the tyranny of compounding costs.
This is very fundamental and easy to learn on your own if you want to, I hope you do. And I only put $50,000 to begin with and stopped, imagine putting more every year (which you do)? The numbers get very scary after that. I can talk about turnover rates and mutual funds holding cash which make the 1% go to 2% but I will not get into that here. Maybe some other day.
So a couple of days ago the New York Times had an article asking financial experts (people way smarter than me) “How should you manage your money? And keep it short by writing it on an index card. Here is the article and here is one of the cards:
Notice anything? I am sure you do. Let me end with saying that everyone should go and look under the hood of their retirement savings to see exactly where their money is being invested. Even with the stock market free falling this past week I am sure many did not look at their 401ks, IRAs and other investment accounts. Remember, the fund managers are taking their fees regardless of your account going up or down. Either way they are getting paid (what a great gig!).
I hope this gets some people ready to take action and control of their money but I am sure the majority probably still won’t give a SHIT!
I would love to here your thoughts in the comment section. You can always reach me on Twitter @mjassal as well.