60 Minutes Examines Retirement Accounts, Specifically 401k… But It Applies To All Brokerage Retirement Accounts
If you’ve grown uneasy with your retirement plan…you’re not alone. In this segment 60 minutes explores issues common to all brokerage account retirement plans. Are we all smart enough to outsmart Wall St.? Or is our retirement savings a crop to be harvested?
Unfunded Pensions: How Confident Are You In Your Retirement Income?
The CalPERS pension fund earned 1.1% for 2011. Now I’m not in a position to criticize their investment choices as my mutual funds and stocks had a net loss for 2011. So… Good for them.
But here’s the thing…
In order to fund the pensions of future retirees from the State of California, assumptions are made on how much money will be needed to pay future benefits and how much invested money will grow. The long term rate returns required for the State of California to satisfy pension requirements is roughly 7.5%.
Uh oh!
In 2007 CalPERS pension value was at a record high of$260.4 billion in October 2007, dropped to $160 billion by March of 2009 and has roughly $229 billion in assets as of January 2012. So essentially down about 12% for the past four years. That can’t be good.
I hope it all works out. A lot of people are relying on this. And the truth of the matter is… a Government pension is as safe as it gets. What about the rebels who chose the corporate life or the rest of us mavericks who got all mavericky and started our own businesses?
Personally, I have come to the conclusion that the world is even more unpredictable than I once thought and the systems I once had implicit faith in are never too big to fail. I was holding GM bonds (now warrants) for the once biggest corporation in the world. Crud!
I believe everyone should seriously consider contributing to their retirement income with investments that are completely independent of their pension and stock/mutual fund holdings. I’m not talking about just state employees, but everyone.
For me and my clients, that will be income producing residential real estate. Prices are low, there will always be demand for housing and income is protected from inflation. You could feel financially secure growing old with that.
If you want to learn more about how you can join us, or discuss the extraordinary opportunity Sacramento area residents will be presented in the coming years, don’t be bashful, just give me a call.
Bill Joyce, Broker (916) 206-7282
S&P Compound Annual Growth Rate of -1.95% since 1/1/2000
Wait…What?
According to the S&P CAGR (compound annual growth rate) calculator at Money Chimp, $1.00 invested in the S&P 500 in 2000 grew up to be $.79 cents by December 31, 2011 when adjusted for inflation. OK, so this millennium is off to a rocky start on a lot of asset classes, real estate included. But that’s extra bad when you consider that doesn’t account for the rather significant fees and expenses calculated in the returns of a real fund. Fund fees usually run about 1% to 1.5% per year, bringing your net loss to around 30% of your nest egg. We all have lost a lot of ground this past decade.
So what do you do?
In my opinion, the best investment anyone, or family, can make is in carefully and cautiously starting their own business. Something you enjoy doing and aren’t pining away for the day when you can finally stop doing it. The ability to develop a retirement income from a business you enjoy will make for a more vibrant and financially stable retirement. Doing nothing may not be all it’s cracked up to be…especially if you live to a nice, ripe old age or run out of money and actually can’t afford to do anything. Running a small, part time business into your retirement will keep you active, involved, meeting people and making some extra money.
Second, own an income property, or two, or five. There will be very few sources of retirement income as stable, secure and inflation resistant as income property. Right now prices are low, interest rates are incredibly low and competition from other investors is…OK, well that’s starting to pick up because the end of foreclosure mayhem is within sight.
What most people don’t know…is that you can use your retirement account to buy real estate. Your IRA, SEP IRA, 401K, KEOGH and on and on, can be used to invest in your new retirement plan… income properties.
Perhaps it’s time to start your own retirement plan…on your own terms.
Stock & Fund Investing Vs. Gambling
“It is generally agreed that casinos should, in the public interest, be inaccessible and expensive. And perhaps the same is true of stock exchanges.” – John Maynard Keynes
The comparisons between investing and gambling are easy and obvious. Especially in times of serious market declines the small investor loses faith and looks for alternatives. Most of us have picked a few winners and losers and know the corresponding exhilaration or disappointment is very much like gambling.
But the obvious distinction is the need and benefit of knowledge, information and experience. It isn’t random acts of chance that drive the stock market. Perhaps that’s the market’s greatest seductive influence… we have reason to believe we can get better, be smarter and win.
An interesting fact; after the end of the cold war the intellectual brain trust of mathematicians and physicists once employed by superpowers locked in an arms race migrated to finance. They are the new breed of quantitative analysts referred to on Wall St. as “Quants”. Their job is to understand markets and exploit opportunities. They don’t care if others make or lose, their job is to find profit opportunities and exploit them. Imagine the capacity of a brain that could devise a bomb that could split an atom and destroy a city, applied to making money off the ordinary machinations of the stock market.
The small investor is outmatched by those prepared to outsmart the collective wisdom of the part time investor managing their nest egg.
Ultimately, the proof is right in front of you… what has your money made over the past 10 or 20 years? Not what you’ve added by being a disciplined saver, but returns made from your investments. For most of us, it is a discouraging figure. And adjusted for inflation, even more disheartening.
The real question is… What can you do about it?
What ARE you going to do about it?
Asset Allocation Vs. Stock Picking & Market Timing
Do you wonder if you can really win in the stock market? Or for that matter if your mutual fund manager can do any better?
There was a study published in 1995 “Determinants of Portfolio Performance” that studies the performance of 91 pension funds over a 10 year period. In particular, the focus was on distinguishing the relative importance of stock picking, market timing and asset allocation on overall returns.
The result, asset allocation had the most significant impact on the performance differences between funds. In fact, it was credited for 94% of the variation between fund performance.
What does this mean? First, it means that stock picking and market timing have little to do with even professional managers ability to create wealth. Examples of those making great gains are offset by the corresponding losses of others. It means that putting your money into the appropriate types and balance of investment classes will contribute more than attempting to pick the right stock or fund. Further, actively managed funds that attempt to pick stocks and time the market will have the same challenges.
Remember the Wall St. Journal “Monkey vs. Professional” stock picking contest? I think the pros won, but it was no resounding victory. The fact that this feature ran in the Wall St. Journal for 11 years is telling in and of itself.
Choosing the right asset classes and allowing them to grow and prosper may be the single, most simple solution to creating real long term wealth.
By the way, real estate is an excellent way to build wealth. Many have done it, so can you.
