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Your 401K Could Probably Use A Professional Opinion Thumbnail

Your 401K Could Probably Use A Professional Opinion

Your 401K Could Probably Use A Professional Opinion

Did you know that the S&P 500 has historically averaged a return of approximately 10 percent? Did you know over that same period of time the average investor in a 401K has averaged a return of only 3.9 percent? How could that be? Why is your 401K only returning 4 percent when the market has averaged 10 percent?

Emotion Is Driving Your Decisions

Emotion can drive investors to make terrible decisions. Just go back to when you were a teenager and you were "in love." All those decisions you made then probably seemed like the right choices. However, with 20 plus years of hindsight in the rear view mirror, most of us can see that many of those decisions weren't good ones and almost all of them were based on emotions.

Emotion drives the average investor to chase the latest, hottest investments after they have peaked and then they sell the investment after taking the ride all the way to the bottom. Everyone has heard the phrase “buy low and sell high,” however, very few 401K investors do this. Many commit the cardinal sin of buying high and selling low without even realizing it. Most of the time that decision-making process was based on emotions.

A classic example of this was during The Great Recession of 2008. Markets fell by 49% and many people panicked. Since they could "control" the investments in their 401K they did what they could to stop the bleeding in their investment accounts. And they did precisely the wrong thing...they made decisions based on emotion. They sold low. They locked in 49% losses for the rest of their lives. We don't need to get into math here but it is extremely hard to ever come back from a 49% loss.

What's interesting is that during that same time period housing prices fell between 10% - 35% depending on where you lived, but I bet you didn't call your real estate agent and list your home for sale. Why? One reason is that there’s a barrier between wanting to sell your home and actually doing it. It takes more than logging on to a computer to sell a house. The second reason was probably because you didn't want to lose money (and possibly a home that you loved).

*401K Tip:  Investments are much like a house. You don't actually lose money until you sell the investment at a loss.

Do You Actually Know How To Manage Money In Your 401K?

Let's take a realistic look at a 401K. Most employers offer one to every employee but most of those employees have zero training in how to actually manage money based on their age, goals, retirement plan, etc. 

Let's look at the Great Recession example again. Had you been properly invested in your 401K based on your age, goals, retirement plan, etc. there would've been nothing to worry about at all. In fact, once the market went down you could've bought and locked in a 49% gain! Why didn't everyone do that? My guess is they were still making emotional decisions. Guess who wasn't making emotional decisions? Professional investors and investors working with a financial adviser. Guess who made a lot of money during the Great Recession? I think you know the answer.

Here's an analogy I like to use with regard to 401K plans. Would you take a free car from your employer with the only stipulation being that you have to do all the maintenance and repairs on the car for the entire life of the car? Yes, we would all take that deal and some of us can actually do car maintenance. Many of us, however, have no clue how to even change the oil!  For the first several years that car will run fine but if we neglect repairs and maintenance, over time that car will start performing poorly. In many cases it will stop running all together.

I make this analogy to illustrate the point that, without training, a 401K can actually be a detriment to your retirement plan. You can totally derail your retirement by not managing your 401K correctly. But here’s the good news. There’s help to make sure that doesn’t happen to you.

I Don't Need An Adviser. I'll Just Use A Target Date Portfolio.

This is the default choice for the average 401K participant. They throw 100% of their contributions into a Target Date Portfolio. Which begs the question, what the heck is a Target Date Portfolio?

By definition a TDF is a type of fund model that invests predominantly or exclusively in mutual funds with a certain maturity or specified date in mind, typically the time at which a participant is planning on retiring. In English, that means an investment that rebalances risk as you get closer to retirement. Because TDFs are designed to change their allocation and objectives over time, it’s important for investors to revisit their investment selection periodically to make sure that the investment selected is consistent with their goals, objectives and retirement strategy.

Target Date Portfolios can make it easy to pick an investment strategy based off your retirement date, but they still can't protect you from emotional decision making. Lou Holtz, former college football coach at Notre Dame once said, “You don’t need the big plays to win; you just have to eliminate the dumb ones.” -Lou Holtz

The same concept can be applied to your 401K. You don't need the big investment to win. You just need to eliminate the dumb investments.

You Can Hire An Adviser To Help With Your 401K.

Most advisers, like myself, offer an hourly consulting rate to help you with things such as 401K investing. Did you know that working with an adviser on your 401K can lead to a balance twice what you would've had going it alone? You need to read that again. Twice as much!

At 80/20 Financial Services, we specialize in retirement income and investment planning. If you are age 50 or over and need help with your 401K strategy and your retirement strategy in general, contact us. We don't sell. We help.

You don't have to maintain and repair your 401K plan on your own. Contact a certified 401K mechanic today!

You Need A Plan

A goal of retiring - without a plan to get there - is simply a plan to never retire. Retirement isn't some magical age. It's a dollar amount. If you're age 50 or over and still in the accumulation phase (pre-retirement) we can help you figure out where you need to go and how to get there. If you are retired or nearing retirement, we can create a plan which will outpace inflation and possibly leave a legacy to your family. The consultation is free and without obligation. Contact us to set up a consultation.

For more articles about retirement planning and investing click here.

Thanks for reading!

Brian Coleman/Retirement Income & Investment Planner

80/20 Financial Services is an independent Registered Investment Advisory Firm. Our focus is working with pre-retirees and retirees, who are approaching or going through the retirement transition. We are located in Ozark, MO but we have the ability to work with clients throughout the United States. Contact us today for help with your retirement needs.


Photo by Tengyart on Unsplash