Wall Street and Wal-Mart and Your 401(K)
Last week we received a Wal-Mart sales flyer in the mail.
In it they touted the virtues of "buying now at the lowest prices.
" They claimed that they are working hard to help us save money.
They are looking out for us.
They are on our side, right? Well...
Fidelity Investments sent us a bulk e-mail last week.
In it they touted the virtues of a buy-and-hold investing strategy.
"Stay the course," they proclaimed, and your long-term investments will do well.
Keep buying and holding stocks during bull and bear market cycles and you will do just fine.
Fidelity administers our company 401(k) plan.
They are on our side, right? Well...
Make no mistake about it: Wall Street and Wal-Mart are both in business to make money.
They make money by selling you products over and over again whether you need them or not.
They are experts at marketing those products in such a way that you think you really do have to have them.
You may or may not need that fourth flat screen television in your house.
You may or may not need a second stainless steel cookware set for your kitchen.
Wal-Mart will try their best to convince you that you do need them.
They are very successful at doing this.
That is how they make money.
You may or may not need to be buying stocks in a bear market.
You may or may not even need to be holding stocks in a bear market.
Wall Street will try to convince you to stay invested.
They are very successful at doing this.
That is how they make money.
If the performance (or lack of performance) of the average 401(k) account for the past 10 years has taught us anything, it is this: for mutual fund investors, the old buy-and-hold strategy is dead.
It just has not been buried yet.
Here is some dirt for the grave: - On June 30, 1998, the S&P 500 closed at 1133.
On September 24, 2010, the S&P 500 closed at 1148.
Though there were three bull market cycles during that time period, the two bear market cycles that also took place left "stay the course" investors with a 15 point (1.
3%) market gain.
If not for employee contributions and company match, investors' results would have been basically flat for that twelve year period.
- If investors were holding stocks during the 2000 to 2003 bear market and were within a couple of years of retirement, they were crushed.
The same holds true for the collapse of 2008.
Many people who had planned to retire around these years are still working, trying to "catch up.
" - Company matches, reinvested dividends and stock splits have certainly helped the average investors' bottom lines over the past 12 years.
However, the old adage that stocks typically return 10% over time is not true.
Wall Street now says that 7% is typical, but most experts agree that 5% is a more likely rate of return and the average has been less than that during this past decade.
Investors who save for retirement through IRA's have the advantage of being able to pick individual stocks for their accounts.
Buying solid companies that pay good dividends can help weather the storm of bear market cycles.
IRA investors also have access to ETF's that give them exposure to particular market sectors, precious metals, specific bond types and even "market short" vehicles that can enable them to make money in down markets.
For most 401(k) investors, however, mutual funds are the only investment options.
That puts them at the mercy of market cycles.
Since the majority of mutual funds fail to outperform the S&P 500 on average, why would an investor want to buy or hold them during a market downturn? A better investment strategy would be to invest in stock funds during the bull market phases and move into cash and/or bond funds during bear market phases.
A simple trend following strategy would protect your cash during bear markets and put it to work during bull markets.
Looking back at the past decade, we had four distinct market phases: 1.
2000 to 2003 was a bear market phase (S&P down 50.
5%) 2.
2003 to 2008 was a bull market phase (S&P up 105%) 3.
2008 to 2009 was a bear market phase (S&P down 57.
7%) 4.
2009 to 2010 was/is a bull market phase (S&P up 72.
3%) Employing a simple trend following method would have resulted in: 1.
2000 to 2003 account loss of 11-12% 2, 2003 to 2008 account gain of 65-70% 3.
2008 to 2009 account loss of 11-12% 4.
2009 to 2010 account gain of 40-45% Even though trend following investors move into cash and/or bonds during down cycles, they keep making their 401(k) contributions and getting the company match.
They are still making money.
When the next up cycle begins, they are ready to put more cash to work.
Why do you not get this point of view from Wall Street? For the same reason Wal-Mart never tells you not to buy from them.
Neither make money when you are sitting on your cash! The guy in the suit giving you investment advice is not dissimilar from the Wal-Mart greeter handing you the latest sales flyer.
They are both pushing products.
Over the years consumers have learned to better educate themselves when it comes to their spending, especially on big-ticket items.
Without a doubt, researching a new flat screen purchase is much more interesting than researching the markets, but 401(k) investors need to educate themselves as well.
Include trend following in your market research.
It has been around much longer than "buy-and-hold" and it still works.
Our website, www.
hardhatinvestments.
com was created to provide simple 401(k) and IRA investing guidelines for working folks.
We preach and practice a simple trend following method that keeps investors on the right side of the market.
Get your investing education started with us and learn to take care of your bottom line, not theirs!
In it they touted the virtues of "buying now at the lowest prices.
" They claimed that they are working hard to help us save money.
They are looking out for us.
They are on our side, right? Well...
Fidelity Investments sent us a bulk e-mail last week.
In it they touted the virtues of a buy-and-hold investing strategy.
"Stay the course," they proclaimed, and your long-term investments will do well.
Keep buying and holding stocks during bull and bear market cycles and you will do just fine.
Fidelity administers our company 401(k) plan.
They are on our side, right? Well...
Make no mistake about it: Wall Street and Wal-Mart are both in business to make money.
They make money by selling you products over and over again whether you need them or not.
They are experts at marketing those products in such a way that you think you really do have to have them.
You may or may not need that fourth flat screen television in your house.
You may or may not need a second stainless steel cookware set for your kitchen.
Wal-Mart will try their best to convince you that you do need them.
They are very successful at doing this.
That is how they make money.
You may or may not need to be buying stocks in a bear market.
You may or may not even need to be holding stocks in a bear market.
Wall Street will try to convince you to stay invested.
They are very successful at doing this.
That is how they make money.
If the performance (or lack of performance) of the average 401(k) account for the past 10 years has taught us anything, it is this: for mutual fund investors, the old buy-and-hold strategy is dead.
It just has not been buried yet.
Here is some dirt for the grave: - On June 30, 1998, the S&P 500 closed at 1133.
On September 24, 2010, the S&P 500 closed at 1148.
Though there were three bull market cycles during that time period, the two bear market cycles that also took place left "stay the course" investors with a 15 point (1.
3%) market gain.
If not for employee contributions and company match, investors' results would have been basically flat for that twelve year period.
- If investors were holding stocks during the 2000 to 2003 bear market and were within a couple of years of retirement, they were crushed.
The same holds true for the collapse of 2008.
Many people who had planned to retire around these years are still working, trying to "catch up.
" - Company matches, reinvested dividends and stock splits have certainly helped the average investors' bottom lines over the past 12 years.
However, the old adage that stocks typically return 10% over time is not true.
Wall Street now says that 7% is typical, but most experts agree that 5% is a more likely rate of return and the average has been less than that during this past decade.
Investors who save for retirement through IRA's have the advantage of being able to pick individual stocks for their accounts.
Buying solid companies that pay good dividends can help weather the storm of bear market cycles.
IRA investors also have access to ETF's that give them exposure to particular market sectors, precious metals, specific bond types and even "market short" vehicles that can enable them to make money in down markets.
For most 401(k) investors, however, mutual funds are the only investment options.
That puts them at the mercy of market cycles.
Since the majority of mutual funds fail to outperform the S&P 500 on average, why would an investor want to buy or hold them during a market downturn? A better investment strategy would be to invest in stock funds during the bull market phases and move into cash and/or bond funds during bear market phases.
A simple trend following strategy would protect your cash during bear markets and put it to work during bull markets.
Looking back at the past decade, we had four distinct market phases: 1.
2000 to 2003 was a bear market phase (S&P down 50.
5%) 2.
2003 to 2008 was a bull market phase (S&P up 105%) 3.
2008 to 2009 was a bear market phase (S&P down 57.
7%) 4.
2009 to 2010 was/is a bull market phase (S&P up 72.
3%) Employing a simple trend following method would have resulted in: 1.
2000 to 2003 account loss of 11-12% 2, 2003 to 2008 account gain of 65-70% 3.
2008 to 2009 account loss of 11-12% 4.
2009 to 2010 account gain of 40-45% Even though trend following investors move into cash and/or bonds during down cycles, they keep making their 401(k) contributions and getting the company match.
They are still making money.
When the next up cycle begins, they are ready to put more cash to work.
Why do you not get this point of view from Wall Street? For the same reason Wal-Mart never tells you not to buy from them.
Neither make money when you are sitting on your cash! The guy in the suit giving you investment advice is not dissimilar from the Wal-Mart greeter handing you the latest sales flyer.
They are both pushing products.
Over the years consumers have learned to better educate themselves when it comes to their spending, especially on big-ticket items.
Without a doubt, researching a new flat screen purchase is much more interesting than researching the markets, but 401(k) investors need to educate themselves as well.
Include trend following in your market research.
It has been around much longer than "buy-and-hold" and it still works.
Our website, www.
hardhatinvestments.
com was created to provide simple 401(k) and IRA investing guidelines for working folks.
We preach and practice a simple trend following method that keeps investors on the right side of the market.
Get your investing education started with us and learn to take care of your bottom line, not theirs!
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