Monday, December 23, 2013

Investing Lessons ... And Why 401(k) Plans Are Superior to Pension Plans, Contrary to What the Public Sector Union and Government Officials May Say

A good article summarizing investing lessons we should learn is worth quoting at length and is titled Seven things you should have learned in 2013 --- but didn't. It's subtitled 'Investing lessons that should serve in 2014 and beyond.'

Here goes:

"It’s that tiresome time of year when financial pundits trot out “investing lessons” from the last 12 months. . . .                                                                               
Here are strategies that will serve you well in 2014 — and perhaps longer.

1. Buy and hold works

Vanguard sucked up $130 billion of inflows in 2012 thanks to its rather boring but effective lineup of low-cost index funds. And investors who piled in were richly rewarded in 2013, as the major indexes delivered their best run since 2003.                                        

But if you think this was just a one-year fluke, think again. Consider the S&P has provided a total return of about 10% on average every year from 1926. And more recently, the total annual return of the S&P has averaged about 15% since 1970.

Also consider that when Mark Hulbert compiled his five-year rankings of more than 200 investment-advisory services a few months ago, the top three were ALL buy and hold strategies.

The lesson of 2013 isn’t just that buy-and-hold investing worked (past tense), but that it works (present tense). Remember this before you start tinkering or fretting about valuations in 2014.

2. Forecasting doesn’t work

Robert Seawright recently put together a great list of Wall Street’s “best” forecasts for 2013… which all missed the mark by between 16% and 30%. . . . 

Sure, some forecasters get it right. But nobody gets it right frequently enough to be depended upon — so stop using investment bank research as your primary source for buy or sell calls. It will only end in disappointment.

3. Stop (Obsessing about Inflation)

If you want to have a fun debate on “real” vs. perceived inflation, much in the way folks debate whether the original “Star Trek” or “The Next Generation” was the superior television series, feel free.

But please don’t let your hyperventilation about hyperinflation lose you money — again — in 2014.
Consumer price data from the Bureau of Labor and Statistics shows the rate of inflation hasn’t been above 2% since October 2012, and hasn’t been above 3% since December 2011....                                       

4. Be careful with long-term bond funds


The “taper” officially started this week as the Fed cut back on bond purchases.

And while no one knows precisely how the Fed’s rates policy will evolve in 2014, a few months back we did get a taste of what happens with even a modest uptick in interest rates.

Rates have rolled back a bit, but you can bet they will rise again at some point in 2014. This rough period of rising yields in early 2013 will be instructive as to how things may play out in the New Year.                                         

Consider this as you plot your long-term bond fund holdings in 2014.

5. You have a LONG way to go

What an amazing 2013, right? Well, when you thank your lucky starts for those 25% gains you enjoyed this year, you may want to pray for a repeat performance in 2014. And 2015. And 2016…

Because even after these gains, the average American is woefully behind when it comes to retirement planning.

In early 2013, Fidelity was quick to announce that its average IRA balance this year hit a five-year high… but that was to just $81,000 . The same for Fidelity’s average 401(k) balance of those over 55 — it was up nicely, but only to $255,000.

The old rule of thumb used to be that a retiree needed about 10 times their last year’s salary to retire comfortable. But nowadays, with Americans living longer and health care expenses spiraling ever higher, even a million dollars in your retirement portfolio may only buy a modest retirement should you be lucky enough to live 20 to 30 more years after quitting the rat race. . .

6. Personal preference is not an investment strategy.

{My translation: Don't get caught up investing in the latest thing by listening to your friendly neighbor, or even to your friendly stock broker who is trying to get you to trade often.

Instead do your homework or make sure someone you trust is doing it for you. Otherwise just stay invested in low cost index funds like the S&P 500.}

7. You can’t win if you don’t play

Look, calling the next bubble is fun if you’re a financial media troll looking for page views or if you’re just making conversation while huddled in your bunker this holiday season.

But bubble talk has been incredibly unproductive in every sense over the last few years.

And it will continue to be so in 2014. . . . 

The Investors Intelligence Survey conducted after Thanksgiving showed about 85% of investors were bullish — the highest reading since 1987.                                         

Oh yeah, and the S&P is up 25%, its best year since 2003.

You think it’s really all going to stop NOW, after what we’ve been through?

To be clear, I’d never advocate dumping every penny into stocks because of the big risk involved with that. But 2013 should be proof positive of there is ALSO great risk (or in economic jargon, “opportunity cost”) that comes with sitting out the stock market.

If you keep sitting on your hands, you will never do better than the measly returns offered by the bond market and so-called “high interest” CDs.

If that’s your idea of a winning hand, so be it. But if not, consider upping the ante for a few hands in 2014 – even if the lion’s share of your portfolio is focused on capital preservation."

Summing Up

Investing in stocks over the long haul is absolutely the right thing to do.

In fact, long term 401(k) investing beats pension funds, despite what the public sector union leadership and local government officials may say. (NOTE: A 401(k) account is portable (you can take it with you when you change jobs), and it's funded with real money through cash payments up front from employer as well as employee contributions, unlike many public sector pension promises. Finally, index funds outperform managed funds and do so with less expense being charged to the individual's account.

What's not to like?

That's my take, unpopular as it may be.

More to come.

Thanks. Bob.             

1 comment:

  1. I'm wondering, what is the difference between a mutual fund and a managed fund? Or am I just being completely confused by the similar names? There are a ton of options out there and I've learned about a lot of them at, but this one isn't one I can specifically remember seeing. I do know what I want to do when I get to retirement, but I also know it's going to take a lot of effort on my part.