October 17th 2011: 99% of Us in Retirement Investing
10/17/2011 0 comments
The demand of 'Occupy Wall Street' protesters reveals a starking reality in the US and the world: the greatest income inequality between the top 1% and the rest of us. The world is in an era unseen since World War II: an uneven and unstable economic period that might spread to political and social unrest.
In investing, the great divide also exists: you see 99% of plan participants are getting lower or zero returns in the past decade while the other 1% (big shot hedge funds and some wealth management programs catering wealthy individuals and institutions) have achieved doubled digit returns. In fact, from a report by the Department of Labor, EBSA estimates that from 1998 to 2007, the average annual returns for IRAs were 4.5 percent, compared with 5.4 percent for 401(k)s. In the same period, Vanguard balance fund index (VBINX) rose 6.5%% annually, while S&P 500 (Vanguard 500 VFINX) rose 5.84% annually. On the other hand, hedge funds notched 8.7% average annual return (see EDHC report).
Some of the main issues why the rest of us achieved lower returns (and bigger risk):
- High fees: the never ending of new fund issuance, insurance products that charge high fees with convoluted disclosures in small prints, various mutual fund classes and the outrageous fees charged to many uninformed 401K plan participants. Professors Edwin J. Elton, Martin J. Gruber and Christopher R. Blake at the New York University reported "that S&P 500 index funds, we find that the index funds chosen by 401K-plan administrators are on average inferior to the S&P 500 index funds selected by the aggregate of all investors." (see The Adequacy of Investment Choices Offered By 401(k) Plans)
- Ill structured 401K design and low quality fund choices: we recently studied Ameriprise 401K (see Ameriprise Employees Filed A Suit Over Expensive 401K Plan Fund Choices) and found that the plan has 19% (out 100%) rating by MyPlanIQ. It has only 3 asset class coverage (as many other 401K plans) and very low quality funds (ranked 4% out of 100%)!
- Continuously touted buy and hold strategy that leads investors and retirement participants blindly. We are not here against the buy and hold strategy. In fact, we always advocate that strategic asset allocation should have a place in one's portfolio. But simply treating this as a dogma and do nothing while letting other high frequency traders, market makers, macro even hedge funds and long short funds to take advantage of the mass is somewhat shocking.
Certainly, while blaming others can be one way to vent one's anger, it is more constructive to take an active role to solve the problem. We offer the following suggestions:
- Talk to your human resource personnel, show them how the plan is stacked up against others and why and how the plan can be improved (in three areas: lower fees, better fund quality and better diversification coverage).
- Equip yourself with knowledge: first get your own investment portfolios in order based on asset allocation (diversification) principle, and then consider to enhance this by using various low cost services offered out there.
- Stay connected with other fellow 99%: the internet now enables us to exchange information in a fast and efficient way. Ask questions and help out others.
Market Overview
Last week, markets whip sawed back amid the euphoria of European debt solution and economic developments (some positive numbers such as retail sales in September). Markets have been behaving not entirely based on underlying economic factors but have been driven by government policies. This has been a difficult period for many investment strategies.
Some interesting observations brought up by ZeroHedge.com on such a rapid ascend of the world wide equity markets:
Last week, all risk assets rose substantially: US stocks (VTI) rose 6.27%, International stocks (6.41%), emerging market stocks (VWO) 8.67%, US REITs (VNQ) 6.31%. However, all of the risk assets are still ranked below short term treasury bills (SHV).
For more information on how these assets are ranked, please see here.
Benchmark Portfolios
Always, we review one of the featured ETF plans listed on ETF, Mutual Fund Portfolios" page. Let's look at Vanguard ETFs that consists of 50 low cost Vanguard ETFs.
Portfolio Performance Comparison (as of 10/14/2007)
| Portfolio/Fund Name | 2011 YTD | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|---|
| SPY | -2.1% | 5% | 4% | 13% | 23% | -0% | -9% |
| Vanguard ETFs Strategic Asset Allocation Moderate | -4.68% | -2% | -16% | 9% | 45% | 4% | 19% |
| Vanguard ETFs Tactical Asset Allocation Moderate | -0.27% | 1% | 10% | 8% | 60% | 10% | 65% |
| VBINX | 0.83% | 5% | 14% | 12% | 46% | 3% | 10% |
Refer here for more detailed comparison.
Recent Articles
- Ameriprise Employees Filed A Suit Over Expensive 401K Plan Fund Choices
- 401K Investments: Alcoa Savings Plan Review
- Dividend Stock ETFs Withstood Market Swings Better In A Retirement Income ETF Plan
- Core Satellite Portfolios For Long-Term Investments
- 7 Dividend Stocks Selected For Their Performance In Bull And Bear Markets
- 5 Great Companies For Your Portfolio
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Disclaimer:
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