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.
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.
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?
