Why exactly 401K is a riskiest investment of all – mutual fund

Regardless of what happened on 2000 and also 2007, many folks appear to be using the conventional investment vehicle, like 401K as their key investment vehicle (I was absolutely disturbed to find out just how many guru to be individuals coming from investment / money online community continue to consider 401K is path to acquire good wealth). Personally, I’m not investing in dime in 401K (I used to but not anymore…) due to the fact there’s not any advantage for making use of those as good investment. Even worse, these investments are worst as well as riskiest investments of all. For this blog, I’ll talk about my own notion of the main reason why investment such as 401K is a worst type of investment and ought to never ever put any cash in it.

 

Reason 1: Current economic prospect

 

As we have a look around the globe, eurozone is without a doubt verge of go into default and also other western world also following a very same path. Now there is going to be another Lehman moment within this year similar to 2008. Stock market failure that brought on by euro sovereign debt disaster will wipe out most of people’s life saving and also investment. This is actually unavoidable. Mass-produced financial counselor is going to indicate to average persons that you need to diversified the portfolio so that you can reduce the risk. Interestingly, This is simply not diversification whatsoever. True diversification requires you to diversify around all the asset classes including stock, real estate, commodities and also business. So what most people are doing is to buy all of the fund randomly as though we’re betting the many horses at horse racing with no taking into consideration which one will win. Regardless if individuals effectively diversified his or her 401K portfolio, stock is still stock and all of these mutual funds including 401K simply cannot prevent from the systemic stock market crash mainly because all the stocks definitely will tumble just like a rock when it occurs.

 

Reason 2: Having to pay maximum taxes (In the case of conventional 401K)

 

I’m not really speaking about mutual fund right here but purely referring to conventional 401K. “Deferring the taxes in order that fund will build up faster because of power of conpound interest!”. This is mass-produced financial advisors would advice to individuals who are lack of financial education. On the other hand, what they will never explain to those individuals is the fact that people investing in 401K must pay highest tax possible in the end. And, with this state of overall economy, what do you think tax will go? Tax will simply go up down the road (Maximum tax in US was 97%. Simply for your info). Those that keep putting money in 401K can be very upset just how much the government is going to take their money at the end.

 

Reason 3: Incredibly illiquid

 

Yet another popular sales speeches from financial planner is “Your employer can match your contribution so that you should put more money”. In some sense, it is true. On the other hand, once we invest in 401K, we can not withdraw your money until 59 and half years old except in cases where quitting the jobs or serious emergency circumustances. It is huge minus. According to the John Williams from Shadowstats.com, latest inflation rate is 12% (Absolutely not government number, uncle sam constantly manipulate the figure with bogus scheme). Historically, mutual fund is paying around 8%. In other words, we will be certain to lose 4% annually on average. But, cannot move the money around before the specific era. We cannot even use those fund from 401K even though good investment opportunities come to our way.

 

Reason 4: Fees and expense 

 

Fees and expense for most of the 401K and mutual fund are really costly. Common expense ratio of these funds are usually 1 – 3%. Hence, it looks like very low expense. Interestingly, it actually is further from the facts. The more money and more time we hold, the more it’ll cost us. Expense can certainly gather approximately 70% of whole fund value as we carry something like 40 to 45 years. Numerous regular financial advisors’ yet another marketing tactics might be “Make use of your compound interest to your advantage”. However , what they will not show you is that there will be compound expense. The more dollars you have and more time you hold, the more cash is going to be taken out for an expense.

 

My biggest fear in this is not really expense itself but opportunity cost of putting the money into 401K. Suppose that we are not investing in 401K but instead putting the money into various other investment options that yield higher rate of returns, how much we lose because of investing in 401K or other typical investment? This can be extremely massive depending on the skill of investors.

 

Reason 5: Simply no control

 

With 401K, there is absolutely no power over the fund itself. Only thing we could do is to move from one fund to another. In deals like real estate, we can physically discuss with the property manager or some other vendors to improve or modify the situation pretty quickly however it is impossible for people to say to fund manager what to do. A whole lot worse, imagine if fund manager themself doesn’t have much knowledge about this current economic climate? In my view, many people invest in investment vehicles that absolutely no control or very little control over. Have you actually believed the reason why banks bring bucks to put money into real estate property and never lend money to invest in mutual fund or 401K? This is because simply no power over. That is simply too risky for the banks to loan the money for the project that is absolutely no control over. 

 

Reason 6: Zero protection whatsoever

 

Investments for example business and real estates can be covered by insurance that actually covers the loss whenever something goes bad. However, there’s no insurance for 401K. If we all go to the insurance office to inform agent if there is cover for 401K or mutual fund, they will be laugh at us and definitely tell us “Absolutely no”. If we lose the whole thing in 401K or mutual fund, we are going to lose the whole thing we’ve have and mutual fund or 401K companies will take all of the money. For me, this is risky.

 

All of these 6 factors verify me that putting money into 401K may be the riskiest thing people can do. This is absolute insanity to actually invest in financial vehicle that

 

1. Pay highest possible tax – even lose only advantage of the stock investment: capital gain

 

 

 

2. Highly illiquid – simply cannot take out your money until very late

 

3. Unusually high expense (accumulated expense)

 

4. Simply no control over

 

5. Hardly any protection

 

6. 100% exposure to the systemic risk

 

 

 

Yet, lots of people are assuming this is the path to wealth. I feel just unfortunate to witness most people inadequate financial education. In the future, I’m worried that millions will suffer their life saving due to what is about to happen. I do sincerely hope more and more people will get financial education. so that they can invest their hard earned cash a lot more intelligently than only throwing the money away to riskiest asset of all. In last statement, I am going to say it one more time with Warren Buffett’s quote “Wide diversification is only required when investors DO NOT UNDERSTAND what they are doing”.