401K investment tips

1. Use Vanguard in your 401K if you can.
    
2. Do not count on any returns in your 401K account. Your after-inflation return probably will be zero or negative. In other words in best case you will get back only those money that you put in.  Everything else will be eaten by fees.  In other words you will have only the money you put in. No more, no less.
    
3. Never buy annuities if you have regular pension (or substantial pension from other company). You can emulate annuity by spending most  of your 401K till you get 70 years old and getting bump in size of your pension from Social Security and/or via Roth account (investing, for example, in mixture of junks bonds and TIPs)
    
4. Never put all eggs into one basket be it stocks or bond. 100-your age stock/bond is the strategy you can implement using Vanguard funds without costly "target date of retirement" plans.
    
5. Remember that total return for S&P500 in comparison with stable value fund for the last 10 years was zero or negative and it was lower then the return of Pimco Total Return fund.  The same is true for the most 10 years periods since 1996 (assuming cost averaging from zero).
    
6. Don't staff money under the mattress. Use gold or Tips. 3% inflation will eat 50% of your savings in approximately 25 years.
    
7. You can accumulate tax free interest on your 401K account till the age of 70 1/2. Retirees age 70 1/2 and older are required to take distributions from traditional retirement accounts and pay any resulting income tax. But it is more prudent to delay getting you Social security pension till 70 instead if you can afford that. Remember that Social Security Pension is indexed by inflation, while your 401K account is not. 

NEWS CONTENTS

• 20130202 : Stock losses take hefty toll on nest eggs ( Retirement- msnbc.com )
• 20130202 : Fooled by Stimulus - Structural Problems Still Intact ( Fooled by Stimulus - Structural Problems Still Intact, )

Old News ;-)

[Feb 02, 2013] Stock losses take hefty toll on nest eggs

Retirement- msnbc.com

The meltdown in the markets comes as pensions are being eliminated. The burden is increasingly on individuals to manage their own 401(k) plans and invest in the market.

In 1980, 60 percent of workers were covered by defined-benefit pension plans and just 17 percent relied on defined-contribution plans, such as a 401(k), according to the Center for Retirement Research at Boston College.

By 2004, the numbers had changed dramatically: 11 percent of workers were covered by defined-benefit plans and 61 percent were covered by defined-contribution plans.

"I think what this catastrophe in the financial markets highlights is how vulnerable this approach to retirement makes people," said Alicia Munnell, director of the center. "Their welfare depends on market gyrations. They can be very responsible and still end up being hurt."

Fifty-five percent of people surveyed for the AP-GfK poll said they were worried that the financial crisis would reduce their savings and force them to postpone retirement. The poll, conducted Sept. 27-30, was based on phone interviews with a nationally representative sample of 1,160 adults. It had a margin of error of 2.9 percent.

Investors have endured a rough ride in the market. The third quarter's decline of 4.4 percent marked the Dow's fourth straight quarter of losses - the longest losing streak since a five-quarter drop that ended in 1978.

And it's not just that their investments have declined by nearly 24 percent since last October. It's the worry that the market won't make up those losses anytime soon.

Morningstar Vice President John Rekenthaler said investors can expect to wait as much as three years to recover the market losses they see in their 401(k) or other investment accounts.

The five bear markets since the 1960s have lasted an average of 3.4 years from the beginning of the decline to recovery, according to Morningstar's Ibbotson Associates.

Fooled by Stimulus - Structural Problems Still Intact

Bill Watkins, a California Lutheran University professor, provides a nice summary on New Geography of the failure of various stimulus efforts to do anything meaningful in the wake of a collapse by Lehman, a collapse he says is a "regime shift".

Please consider Flexible Forecasting: Looking for the Next Economic Model by Bill Watkins.

The world changed in September 2008. We call it a regime shift. It's a move from one (good) equilibrium to another (bad) equilibrium. Statistical models that worked well in the old regime don't work in the new regime. We hustled to adjust our models, but admitted that with limited experience in the new regime, we were less confident in our forecasts.

Some economists didn't recognize the regime shift. They went about their business using the same old models in a new world. Comments about the length of a typical recession or about how sharp declines are followed by rapid recoveries were clear signals that the speaker didn't understand the situation.

Some economists were fooled by the stimulus. The rules of accounting cause government spending to be reflected as an increase in economic activity. Stimulus plans such as Cash for Clunkers and tax credits for home purchases moved the timing of transactions, artificially reinforcing the direct spending impacts. Similarly, bailouts and foreclosure prevention programs postponed the recognition of losses.

Many interpreted the resulting increase in last winter's reported activity as permanent, but that could not be. We were not building anything or laying the groundwork for sustained prosperity. Instead, we were just continuing the previous decade's consumption binge. The banks had failed, but the government had stepped in. It became the mother of all banks, borrowing from future citizens and other countries to fuel today's consumption.

Today, enough time has passed that even the most slowly adapting forecasters are forced to confront the post-2008 data and the government's failed economic efforts. As forecasters confront these facts, their forecasts are becoming increasingly gloomy. Now, forecasts of protracted malaise or even a double-dip recession are increasingly common. Why?

Because we borrowed to extend a consumption binge, and we compounded that error with omissions and perverse policy.

The stimulus's omissions are glaring.

• We didn't significantly invest in infrastructure that would improve our future growth.
• We failed to address the weaknesses in our education sector that fuel increasing inequality, sentence many to a life of hopelessness, and permanently constrain our economic growth.
• We did nothing to encourage small business's growth; in an example of perverse policy, we are actually creating a new regulatory regime that favors large companies.

Then there were the actions that will probably restrain future economic growth. The minimum wage was raised. We had health care reform, but we didn't address the real problem: the fact that the health care consumer pays an insignificant portion of the bill at the time of consumption. We had financial reform that failed to address the fundamental problems of too-big-to-fail, and we protected risky activities, increasing the regulatory burden and crippling the ability of small banks. We halted much of our offshore drilling.

Looking forward, there is little reason for optimism. We're considering huge increases in our energy costs through greenhouse gas regulation. We have a massive tax increase scheduled at the end of the year.

While a double-dip recession is not the most likely outcome, we can't reject the possibility. More likely, we face a long slow struggle to overcome ourselves and restore real prosperity. The forecasters' consensus appears to be moving toward accepting that reality.

Massive Policy Errors

Bill Watkins discusses many of the things I have been talking about on this blog for years. Nonetheless, I thank him for a nice summary of why stimulus failed and also for recognizing that stimulus measures would fail in advance. Policy errors certainly have been rampant and very few economists saw them.

Watkins thinks economists now understand the "regime shift". More than likely, most of them don't. Instead, economists have a tendency to project current economic status forward, without understanding why. Because things have slowed down, economists became a more realistic. I doubt their understanding is much better.

If there is another round of stimulus accompanied by another uptick in the economy (the former is likely coming but probably not the latter), I have no doubt economists would think we are off to the races again and this was just another "soft patch".

In contrast, I propose we are going to flirt in and out of recession for perhaps a decade, just as Japan did. Interestingly, every time the Japanese economy rebounded slightly, economists thought "thank God, deflation is over", only to see the Japanese economy relapse.

Problems Many, Solutions Nonexistent

• Tide of Debt: Consumers are swimming against a tide of debt with no way to pay it back.
• Demographics: Boomers are heading into retirement scared half to death because they did not save enough.
• Jobs: There is no source of jobs
• Wages: Global wage arbitrage
• Attitude Changes: a secular shift in the attitudes of consumers towards housing and risk taking is underway.
• The Fed is powerless It can print the money but can't change attitudes.

Regime Shift? What? When?

Lehman filed bankruptcy in September of 2008.
For comparison purposes, I started posting on the phenomenon of people Walking Away from their houses in January of 2008. Here are some Links to Walking Away articles.

What is the real regime change: People willing to walk away from their homes for the first time in history, or the bankruptcy of a single company?

That people would voluntarily walk away from their homes is without a doubt a "game changer". It turned economic theory 180 degrees. Almost no one thought that would happen.

In contrast, nothing especially important changed in September of 2008. That Lehman would file bankruptcy is at best a symptom of attitudes that had long since changed.

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Last modified: July, 11, 2019