You don’t have a lot of good options as a 401K investor when it comes to your investment strategy. Your strategy is very important, however, because your strategy dictates your results, and your results dictate what kind of retirement you will have – comfortable or difficult.
ULTRA-CONSERVATIVE
Some people simply cannot stomach any losses in their investment portfolio. These people are called highly risk-averse investors. They are forced to limit their investments to money market funds, guaranteed income funds, and shorter-term bond funds. Stocks are not an option for them. As a result, they end up with low investment returns – between 2% and 4% per year.
ASSET ALLOCATION
You can follow the advice of the investment industry professionals and spread your money across a bunch of different assets. They will put you in a variety of stock funds, large cap, small cap, value funds, international funds, etc. They will also tell you to invest in bond funds. This strategy is the equivalent of the Target Date funds or Lifecycle funds that most 401K plans offer. Following this “blended or balanced” approach will give you annual investment returns that are a little higher than the typical conservative investors - somewhere around 6.5% per year. The Target Date fund investors still don’t get high enough returns to be able to retire comfortably. And Target Date fund investors also get crushed in stock market collapses.
ASSET ALLOCATION WITH ASSET ROTATION
This is version of the asset allocation strategy described about but it involves shifting money between asset classes based on forecasting which asset classes will do better in the next twelve months for example. Since it involves forecasts which are usually wrong, these investors typically end up doing worse than the standard asset allocation approach.
GROWTH
This strategy relies on investing in the funds with the best long-term performance. The funds with the best long-term performance are stock funds - large-cap index funds and large-cap growth fund. These investors can achieve long-term (20 years plus) annual investment returns of between 9% and 10%. But it will be a rocky ride. Growth investors suffer the big losses in bear markets.
GROWTH WITH PROTECTION
This is our Beyond Buy & Hold strategy/system delivered via our Market Signals alerts. It is the same as the growth strategy described above but it shifts money out of the stock market and into safer assets when the risk of a stock market collapse is high and it shifts money back into stocks when the market rebounds. In the long-term, this strategy can produce annual returns of 12% to 13%. It achieves similar results as the Growth strategy in bull market but loses less money in bear markets. And, more importantly, it does not force investors to Buy & Hold & Suffer through market meltdowns. You can learn more about Market Signals by clicking on the home page in the menu bar at the top of this page.
Which investment strategy do you follow?
Happy Investing,
Phil
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.
One of the key benefits of 401(k) accounts is their tax advantages, which can significantly boost your retirement savings over time. However, navigating the tax implications of 401(k) accounts can be complex.
One of the primary advantages of 401(k) accounts is their tax-deferred status on contributions. When you contribute to a traditional 401(k) account, the money you contribute is deducted from your taxable income for the year in which you make the contribution. This means that contributing to your 401(k) can lower your taxable income, potentially reducing your tax bill for the current year.
For example, if you earn $50,000 per year and contribute $5,000 to your 401(k), you would only be taxed on $45,000 of income for that year. This immediate tax benefit can provide a powerful incentive to save for retirement.
The other major tax benefit is the fact that the growth of your investments in your 401(k) or IRA is not taxed during your working life. Your money grows tax free. This allows your money to grow and compound over decades much faster than it would have if the investment income were taxable.
While contributions to traditional 401(k) accounts are tax-deferred, withdrawals from these accounts are subject to income tax. Withdrawals from a traditional 401(k) account are taxed as ordinary income in the year in which they are withdrawn. This means that when you start taking withdrawals from your 401(k) in retirement, you will owe income tax on the amount you withdraw at your marginal tax rate.
It's worth noting that the IRS imposes a penalty for early withdrawals from 401(k) accounts before age 59½, with certain exceptions such as disability or financial hardship. In addition to ordinary income tax, early withdrawals are typically subject to a 10% penalty unless an exception applies. Therefore, it's generally advisable to leave your 401(k) funds untouched until you reach retirement age to avoid unnecessary taxes and penalties.
In addition to traditional 401(k) accounts, many employers offer Roth 401(k) accounts as an option for retirement savings. Roth 401(k) accounts differ from traditional 401(k) accounts in that contributions are made with after-tax dollars, meaning there is no immediate tax benefit. However, qualified withdrawals from Roth 401(k) accounts, including both contributions and earnings, are tax-free in retirement.
Roth 401(k) accounts can be a valuable tool for tax diversification in retirement, as they provide tax-free income that can complement withdrawals from traditional 401(k) accounts and other retirement savings vehicles. Additionally, Roth 401(k) accounts do not have required minimum distributions (RMDs) during the account holder's lifetime, making them an attractive option for those who want more flexibility in managing their retirement income.
If you are at or near retirement age, you should consult a financial advisor about tax strategies for retirement account withdrawals. Figuring out Roth conversion strategies, planning for required minimum distributions and the impact on your Medicare and Social Security benefits is quite complex. Licensed advisors are really good at this kind of financial planning and everyone’s tax situation is unique.
Happy Investing,
Phil
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.
SUMMARY:
Your investment results are well below what a VERY GOOD 401K investor produces.
Yet you are also not getting much loss protection from your supposedly “safer” strategy.
Even though the VERY GOOD 401K investor generates higher returns, they also get clobbered in bear market crashes.
Imagine if you could get the better results of the VERY GOOD investor AND keep your money protected from the huge losses associated with stock market collapses?
How would that feel?
NOTE: For your results, I am using the data from a Fidelity Target Date fund that has a 70% allocation to stocks and a 30% allocation to bonds. The long-term return rate of this fund is 6.4% per year. The average 401K investor only generates returns of about 5% per year. I have found that people seeking my help are doing better than average but still underperforming (generating returns of between 6% and 7% per year).
This chart compares the results for the VERY GOOD 401K investor to your results over the last 16 years. I use 16 years because that is the extent of the history for Target Date funds. Your average annual investment gains are around 6.4% (Target Date fund results). A VERY GOOD 401K investor would have posted annual investment returns of 10.4% per year over the same time period. The only difference between you and the VERY GOOD investor is that they make better fund selections. They only invest in US large cap stock index funds.
The investment industry tells you that the lower returns are worth it because the balanced approach is less volatile and that it cushions your losses during bear market crashes. But how does it do as far as limiting your losses?
Let’s look at graphs of the last two prolonged bear markets in 2008 and 2022. Here we will compare how a VERY GOOD 401K investor did in those downturns compared to your results (same Target Date fund). The lines look very similar, don’t they? There are just a few months where your losses were slightly less than the VERY GOOD investor. This clearly shows that your balanced and “less risky” approach to investing is significantly lowering the growth of your retirement account and it is providing very little downside protection.
The VERY GOOD investor does get crushed in these bear markets – down about 25% in 2022 and down almost 50% in 2008. These scary declines that come from the Buy & Hold strategy are just awful to live through. Our Beyond Buy & Hold system was developed to address this avoidable pain.
The next two graphs are the same as the previous ones only I have added the grey line which represents what the VERY GOOD investor would have produced if they had used our MARKET SIGNALS system that protects against losses in bear markets. Our MARKET SIGNALS system IS designed to limit losses. By limiting the losses, you end up making more money.
The MARKET SIGNALS investor generates another 2% to 3% per year in average annual investment returns compared to the VERY GOOD investor because they lose less money in downturns. Our system uses the same large cap index funds as the VERY GOOD 401K investor. But MARKET SIGNALS tells you exactly when to get out of the market and exactly when to get back into the market during the scary times.
Because MARKET SIGNALS alerts you when to get out, it dramatically reduces the anxiety associated with stock market investing. You can sleep easy at night knowing that your savings will be protected in the event of a market collapse which can appear at any time and for any reason in the highly irrational stock market.
Click the link to learn more about MARKET SIGNALS and what it can do for your retirement.
Happy Investing,
Phil
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.
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