For four decades, patient savers able to grit their teeth through bubbles, crashes and geopolitical upheaval won the money game. But the formula of building a nest egg by rebalancing a standard mix of stocks and bonds isn’t going to work nearly as well as it has.
First of all, I’m ignoring the incorrect assumption of the title that a 401k ever made anyone rich. At best it taught some people not to immediately spend all their money and to instead save some for the future.
The article’s trying to draw a correlation between present times and the 1960-1980 period when inflation was historically high. It assumes that because a 60 40 stock bond split did poorly in that time the same will apply to the immediate future.
To that point, bonds are designed to not perform as well as stocks as they are lower risk investments. Use them only if you are more worried about losing the money(in short term downturns) you’ve already built up than continuing to make your money compound continually and grow.
The reason for bonds in a portfolio is to hedge against the volatility of the stock market. You don’t need them if you aren’t gonna take out the money for 10+ years. Think of them as an insurance policy against the ups and downs of the market. They can help in the short term but in the long term, they are just a waste of money.
The ‘right’ way to invest for growth is to simply invest in a passively managed Fund or ETF with a low expense ratio (~0.05%) that tries to track the SP500 and simply keep holding it in the market. Time in market beats timing the market. Mr. Money Mustache advocates for essentially this approach as well as bogleheads with their investing principles.
Most employer offered 401ks are crap that limits peoples choices to a few ‘select’ offerings and does not include any good mutual funds or ETFs that meet the above criteria. Instead, they have much higher expense ratios that continually drain money from their accounts and rarely even match an SP500 based fund on performance even excluding fees.
The only use for 401ks is to take advantage of any matching policies they have in place. But it’s better to periodically rollover that 401k balance to an self-managed with vanguard IRA or Roth IRA. Any money you want to save in excess of the matching policies should instead be contributed to your IRA or Roth IRA.
Thoughts? I have to admit I’ve been nervous about this for a while now, with “once in a generation” events happening on a seemingly yearly basis, I started saving for retirement in 2019 and it seems like things have essentially traded sideways since then - my accounts are barely worth more than the money I’ve put in to them. The article is quite gloomy.
I couldn’t get past the pay wall to read the article buy I don’t put much stock in people trying to forecast the future. They have no clue what the future brings.
With that said, I don’t think were seeing any more turmoil than at other points in history. If you look back at history there have been major disruptions about every decade (give or take) with more minor static in between. Covid, financial crisis, 911, gulf wars, oil embargo, Vietnam war, Korean war…etc.
People that thrive over time have their investments diversified and adjust as circumstances dictate. Setting and forgetting may not yield optimal returns but you’d probably do just fine long term. The key phrase is long term. I’m talking 40-50 years not just a few years.
Can’t read this specific article, but I’ll point out that the “4% rule” and similar strategies mostly come from historical analysis of only the US stock market and US treasuries. The 4% rule really only works in the US, Canada, and Australia - developed nations that weren’t destroyed by WWI and WWII. The rest of the world has had “once in a generation” catastrophes every 20-ish years, which is just about once every generation. And not little micro-catastrophes like Covid or 2008 that recover after a couple years.
If you’ve only been saving since 2019, that is approximately no time at all. They may tell you that, on average, the stock market returns 8-10%/year, which might make you think that some of your savings should be up 40%, but that’s not how it works. (US) stock market averaged 8% after inflation, 10% including inflation, through the 20th century, but its actual, annual return is more like 10±12%. You need a lot of years to average out that much variability.
The financial industry makes its money on fear. On people scared to make their own decisions, so turn to a professional; or people scared of the future so they do desperate, emotion-driven trades. The financial media are there to propagate that fear. Add to that going into an election year with a Democratic President, and you’re going to see mountains of negative economic sentiment and outlook.
You are looking at it the wrong way, Because the market has traded mostly sideways for a while that means that the market is underpriced compared to what it should be. That is when you should be more willing to invest. I know it seems counterintuitive. This article explains the concept better than I can.
Since ~2019, the SP500 has gone up 45%. That is the equivalent of a 8.5% compound interest rate or 11% simple interest rate per year. If you’re portfolio accounts are under performing that by a big margin than you might want to switch Funds and/or account providers.
There are always gloomy articles and headlines meant to convince you to sell. Because they want to buy your stocks on the cheap.
Everyone always quotes the growth of the S&P500, but isn’t pretty much no one 100% invested for their entire retirement in the S&P500? My 401k is in a target date 2055 and my Roth is split between FXAIX (S&P500, 55%), FSPSX (international, 20%), FSMAX (extended market, 15%), FXNAX (bonds, 10%). It’s a little conservative but not that conservative.
Fidelity says my Roth 1Y returns are 10.8% compared to S&P 500’s 10.3%. It says my 1Y returns on my target date 2055 are 18.0%. Neither of those numbers can be accurate so it’s hard to know what to read in to them. If I try to calculate my returns in a very simple way (take current value, subtract contributions from the last 12 months, which can be easily looked up, call that number X, then find the growth rate that takes the account value I had as Nov. 1st last year and compound that at different rates until it produces X as of now - this gives an upper bound on returns, since the returns of the various money deposited throughout the year at random times is treated as not growing at all), I get 1%. And that’s 1% before inflation.
I know the S&P500 is 10% YoY over really long time scales, and I also know that number is like +/-15% year to year. But it feels like my fund picks are pretty normal yet they’re not worth any more than what I put in to them since I started saving. Because of that, I’d have to have a 30+% savings rate in order to catch up to the “X salary by Y age” rule because the assumptions over the growth rate of the accounts are wildly off in the years since I started investing.
FXIAX has been pretty much flat for the last couple years. Your 2019-2020 contributions should have nice gains, but they’re a relatively small part of your total contributions. FSPSX & FSMAX are pretty flat going back to 2019, with significant declines from 2021. FXNAX has been hit hard by the interest rate hikes. You’ve had a slow couple of years, without enough accumulation to outweigh them.
That’s just the way it goes sometimes. If you look at your returns after a +20% year, it’s going to feel great; if you look after a -5% year, it’s going to feel bad. Retirement progress, in my experience, having lived the dot-bomb, 9/11, the Great Recession, and Covid, does not feel slow-and-steady; it feels like treading water and then rather suddenly having a credible chance. You put money in slow-and-steady, so that it’s invested during those infrequent and unpredictable +20% years. The first year you rack up gains greater than your salary is amazing.
it feels like treading water and then rather suddenly having a credible chance.
That’s a good reminder. Just haven’t had one of those years yet. Thanks for the perspective.
Everyone always quotes the growth of the S&P500, but isn’t pretty much no one 100% invested for their entire retirement in the S&P500?
Why does it matter if no one else does it? Investing is not a social experience. Most people don’t do it because they are uninformed and ignorant about how to manage their money. The easy option is the easy option because you someone else can get more of a cut of your money. You generally pick up to two of these three with any product: good, easy, cheap. The promoted target date funds are usually just easy. They have high expense ratios and are therefore not good or cheap.
I didn’t think an expense ratio of 0.08% was considered high?
Things are down right now, so of course your balance will reflect that. If you keep investing on a regular basis, the dollar-cost averaging will come into affect over time.
I didn’t read the article, but it seems like they are saying that the way money works is changing. Money, stocks, mutual funds… it’s all the same as it has always been. The risk/reward can change, but there’s no way to predict that.
Welcome to a life of investing. I started investing in '08 and everything that was a once in a generation crash. And in '10 when the market recovered, so many thought it wasn’t real. And as the market kept going up '11-'15, so many kept claiming the crash was coming so it was smart to change your investments. I saw so many run for the hills in the dips in '15 and '16 and then completely miss the run up over the next few years. I have some colleagues that panicked following the COVID19 dip, and never got back in and missed the recovery and new all time highs.
The truth is your entire lifetime of investing, it will always feel like this time is different. This time it’s obvious we’re about to crash or it’s obvious we’re about to go on a run or it’s riskier than it’s always been. I’m not going to tell you the market is going to be up in the next year, or next five years, or next ten. But since the late 1800s, a great strategy has been to just keeping investing over time and not trying to time the market.
Initially, your swings of hundreds of dollars will keep you up at night, but if you keep at it, eventually those swings will be in the thousands or tens of thousands and you’ll be able to handle them better. I can’t promise you you’ll win with this type of set it and forget it strategy, but there has yet to be a period of a couple of decades in US History than you haven’t ended up a winner if you have that long term horizon.
Control what you can control.
I’m a risk-averse person, so I’ve always favored reducing expenses. Definitely no debt of any kind at that point. Assets in good condition: hopefully 2 relatively new cars (unless my city gets better urbanism over the next few decades), a house, relatively new roof, appliances, etc. No major repairs or renovations expected, just basic maintenance for a solid 20-30 years.
Between my mortgage, student loans, and car payment today that’s about 60% of today’s budget that I won’t have to worry about in retirement. That just leaves food, utilities, clothes, maintenance costs, etc. If things go well I will be able to live in relative luxury (eating fine food at restaurants, traveling, etc).
From there, the performance of my investments and state of my savings (along with my health) will determine my lifestyle. Maybe I end up spending my twilight years in my house catching up on the backlog of books, videogames, and movies I never got around to. I can live with that.
Yes, I was wondering about the same thing. However, I haven’t been active in relevant communities since a few months after the covid crash. So, I don’t know “what’s up” with the market.
But I think ETFs are still valid. Due to the once-in-a-lifetime events of the past years, I think it’s just many companies having difficulties and a similar amount of other companies doing great. Hence the sideways trend. Or its just the rich controlling the trading being more conservative and buying out everytime they can.
with 401k your locked into the options your employer gives so they have never been great.
Uh fck paywall
Here’s a non-apple news (whatever that is) link but it’s behind a pay wall anyway https://www.wsj.com/finance/investing/your-set-it-and-forget-it-401-k-made-you-rich-no-more-c06552c
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Can someone copy the content for me ?
