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5 myths your 401(k) fund manager is telling you

May 2, 2018, 3:59 PM
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SPONSORED — It’s not just millionaires who retire, but it might just take a million dollars to do it. According to The Motley Fool, you’ll need $1,060,751 in savings to draw $5,000 per month for 30 years. If your nest egg is tucked away in your 401(k), you might be worried that all this market volatility will, well, crack it. If you’re counting on your fund manager to make your retirement comfortable, you might want to question some of the myths he or she is telling you.

You should hold out for the long run

If you’re a long-term investor, you might be tempted to simply ignore peaks and dips in the market. But Ken Peterson from Online Trading Academy has another opinion.

“In January 2018, 80 percent of my retirement account was sitting in cash,” he said. “When the markets are up, especially way up, sell! Or move your money to a money market fund. For people who know what they are doing, these drops in the market have been fantastic opportunities to move into equities or equity mutual funds at deep discounts.”

Unfortunately, many Americans aren’t enjoying as much control over their 401(k) as they could be. This is a situation Peterson urges investors to change — quickly.

“Having my retirement account split between a Roth and an IRA means it is under my control,” he explained. “Today, I began moving my IRA back into equities. I can pick the assets that are strong but undervalued and buy them at attractive prices. For example, BKNG entered at $1,995. MU entered at $45. I am dreaming of AMZN at $1,265 and BA at $300. We’ll see about that.”

Vanguard is your best bet

The best-performing and most popular fund mirroring the S&P 500 is Vanguard 500 Admiral — a fund many potential retirees are depending on. Unfortunately, as of the end of April, VFIAX is down 2.2 percent year to date. While that might not sound like a lot, think about this: The rate of return for this fund — a fund that is supposed to duplicate the S&P 500 — is 78.9 percent. That’s worse than the performance of the index itself. Not to mention that that rate is before you pay your fees. So if you haven’t taken a look at your account for a while, it might be time to do just that — and have a chat with your manager.

Move all your money into bonds

Perhaps your adviser had you move your money into bonds. Sounds like a smart move — except that the average bond fund is down more than 2 percent year to date. And if interest rates rise in the future — as the Fed has promised will happen — those bonds may be an even worse move, since bonds move inversely to interest rates. That said, if you have to invest in bonds, Peterson says gold is where it’s at.

“The best buy-and-hold you could have done this year is gold. It’s up 2.26 percent year to date, while cash is up 0.28 percent year to date,” Peterson said.

The fees are worth it

The fees you’re paying your fund manager or financial adviser are worth the edge you get in the market, right? Not necessarily. The thing is, your funds are likely invested in as many as 200 to 300 different assets. Sure, there are good assets in the mix. But more likely, those well-performing assets are held back by dozens of “losers,” according to Peterson.
“The losses fund managers are forced to take in order to keep their costs in line are ridiculous — sometimes as much as 40 percent,” he continued. “All those management fees, 12b-1 fees and expense ratios add up. They will rob your account of the few good gaining assets you have.”

Mutual funds are making you money

Most people consider mutual funds a safe bet. But Peterson would argue that that idea is a myth.

“This may shock you, but mutual funds are sold to the public like cherry-flavored cough syrup is sold to the public,” he said. “It tastes good. The purpose of the cough syrup is not to taste good, but we won’t take it unless it does. The purpose of mutual funds is to make money for the fund company. They just make it taste good by giving you a little rate of return.”

Market guru Phil Grundy is the long time trader who said if you can find a fund manager who gets you 5.5% net of fees keep him. Per Peterson he does not want to be on record anywhere suggesting anyone use mutual funds. Also, the 2% number is net of fees. Without fees, the SPY is up an average of 3.9% this century. Perhaps that is why people want to do this themselves.

For more information, visit Online Trading Academy.

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5 myths your 401(k) fund manager is telling you