There's no way you read the title right... Is this guy crazy? Everyone knows that investing in a 401k is the secret to obtaining wealth. I mean come on... There's tax benefits, there's the company match, and there's many other benefits! But reading this simple blog may change your perspective a little bit. Now keep in mind that this post isn't for everyone. If you're okay with living a slightly above average life, then investing in a 401k might be a great idea (in fact investing in a 401k puts you ahead of the majority)... But if your goal is financial freedom, put your reading glasses on!
So why might investing in a 401k not be your best option?
1) YOU ARE TRUSTING AVERAGE PEOPLE WITH YOUR MONEY
There's a saying that basically says, "The only place where people trust those with less money than them is Wall Street." Put this into perspective... The average financial adviser makes roughly $60,000 per year. If he was that intelligent financially, don't you think he/she would be making some great investments himself? Wouldn't he be making a little more than just $60,000 per year? Of course he would! There is absolutely no reason to trust someone across the country in suit and tie with your money.. In fact, in trusting this financial adviser, you may very well lose your money during a market crash or even a bad decision on his part! If your 401k is being invested through a mutual fund, think again. It may be far riskier than you think, and you might end up retiring like most of America... Broke!!
2) THERE ARE BETTER INVESTMENTS OUT THERE FOR YOU
Do you see Warren Buffet, Richard Branson, Mark Cuban, Dean Graziosi, or any other successful individuals investing in a 401k or a mutual fund? You don't.... And that's because they see that there are far better investment opportunities out there for them. I'm a firm believer that putting your complete focus on one investment niche is far better than diversifying. Mark Cuban quotes during an interview with Alan Murray that "Diversification is for idiots." How can you really know what's going on with your 401k? Is there any possible way for you to keep track of the hundreds (or even thousands) of stocks that your mutual fund is invested in? Not a chance... Not to mention the fact that countless baby boomers have come to there retirement days without a dime to there name. They had no idea what was going on with their 401k, and when the time came to take their money out, there was nothing there. If you want to truly become financially free, take the Warren Buffet approach. Buffet has gone full years without investing in a single stock, and he has gone through the majority of his career only investing in a few stocks that he understands.... Today the man is worth 86 BILLION dollars. Do you think he knows what he's doing?
3) YOU HAVE NO CONTROL OF YOUR FINANCIAL FUTURE
The main reason why so many people want money (lots of money) is to be in control of there life, or "free." There are several problems with a 401k if you want to be in control of your financial future, however. Firstly, if you want to take any money out of your 401k before you are 59.5 years old, there is a 10% deduction... Secondly, if your only investment is in your 401k, you have absolutely no control over how much money you're going to gain or lose 30 years from now (or even one year from now!). On the other hand, if you analyze every single investment you go into, YOU are in control of where your money goes, and YOU are in control of your future. Whenever I go into a real estate deal I analyze the location, the price, the taxes, cost of insurance, the building material, and countless other factors before I go into a deal. I know for a 100% fact that I'm going to make money going into the investment. With a 401k this simply isn't possible. Warren Buffet thinks the exact same way going into a stock. For example, in "Buffettology" by Mary Buffet, Buffet constantly talks about how he would rather invest in 5 stocks that he can truly understand and analyze, than to blindly invest in a stock that everyone else is investing in. Everyone is investing in Bitcoin right now.... Buffet is not. One of his favorite sayings is, "If a taxi driver tells you to invest in it, it's probably time to sell your investment." Don't follow the crowd, take control of your financial future!
Like I said in the beginning of this blog... Investing in a 401k CAN be beneficial. Many financial experts advise people to stay away from it, and many others say it's a great financial option. It all comes down to this: If you know how to analyze an investment and make a calculated decision, then that is likely your best option (I say likely because if there is a company match, it may be a good idea to eventually put all of your funds in an IRA, and then transfer to the investment vehicle of your choice). If you are uncomfortable with investing on your own, and would like someone else to do it for you, then maybe a 401k is best for you. That being said, whether we like it or not, we live in an economic world. Almost every decision we make in life has to do with money one way or another, and if you don't know what you're doing financially, the world is going to crush you. If you don't know what to do with your money, someone else will, and it might be at your expense. Take control of your own financial destiny, and don't go into things that you don't truly understand. Take the time to read about finances, learn the pros and cons of your investment decisions, and become totally fulfilled knowing that you have control of every decision in your life!
Thank you to all for reading, many more to come.
You have some very interesting and valid points here, James. However some of these are a little misleading and I have to argue that this is an extremely pessimistic view of 401k's.
ReplyDelete1) YOU ARE TRUSTING AVERAGE PEOPLE WITH YOUR MONEY
Well, yes... I really can't argue this point but I'm not sure you can either. I'm not really sure how you define average. However, after working at a financial institution for a summer I learned very quickly that the portfolio managers are far from 'average'. I was seeing 1+ million dollar bonus go out to some of the portfolio managers. If income defines an individuals qualifications in order to manage your money.. they absolutely portfolio managers are qualified.
2) THERE ARE BETTER INVESTMENTS OUT THERE FOR YOU
ehhhhhhh..... Again yes and no. Of course there are better investments out there. Individual stocks can rise and fall well beyond that of the average rate of return of most mutual fund offered in 401k plans. However, "The average annualized total return for the S&P 500 index over the past 90 years is 9.8 percent. For 2017, in just under half a year, the S&P 500's total return is 9.7 percent". The SPY is a index fund that tracks that of the S&P500 and also pays a small dividend. For those of you who do not know what the S&P500 is, it is an index that represents the United states 500 best performing companies.
$SPY (S&P500 fund) also pays a small dividend. So lets do a little math:
If you max out your 401k every year (18k, with only about 10k being yours assuming employer matching of 8k) for 30 years (the course of an average career) at a 10% return rate (Adding average return of S&P and small divendend payout):
http://www.moneychimp.com/calculator/compound_interest_calculator.htm
You will have a staggering: $3,571,070.89 by just using 10k of your own money a year!
You still have plenty of other disposable income to place in riskier areas, but not utilizing your 401k, and ROTH IRA to the absolute max, you are shooting yourself in the foot.
NOTE: If the S&P500 fails and you loose all your money... well no one will have any money and we are at nuclear war.
Summary: A long term average of 9-10% is extremely hard to beat. Very VERY few companies do that on a long term consistent basis. Yes, AAPL AMZN FB etc all have done much better than that, but those are a small small percentage of US companies.
3) YOU HAVE NO CONTROL OF YOUR FINANCIAL FUTURE
I respectfully am not even going to comment on this bold statement. That is far from true.
Continue to share your opinion my friend, love what you're trying to do.
-Jeremy
Hi Jeremy,
DeleteThank you for commenting! I would like to offer my opinion:
1) While it's true that financial advisers probably make some investments on their own, and while it's true that many financial advisers are "above average", keep in mind that if they were REALLY good in the investment game, they probably wouldn’t be an employee at all... They would be a full time investor, entrepreneur, business owner, etc. The whole point was to simply say, be careful who you trust your money with!
2) While I agree that a 9.8% return is good, (Even though 9.8% isn't even guaranteed for everyone who invests in their 401k) I would claim that you can receive a far higher ROI through other investment vehicles...
Let's take the same example that you gave us: If I took $10,000 of my own money for 30 years, and instead of investing it in the S&P 500, I invested it into real estate. I leverage my capital every year, and with my $10,000, I purchase a $50,000 house every year for 30 years. Every piece of real estate I obtain through those 30 years appreciates (sure markets go up and down but real estate has been slightly above inflation for the past century), Every piece of real estate allows me to depreciate my taxes (I am receiving passive income rather than having to pay income taxes through a dividend), and every piece of real estate is cash flowing $800 gross per month (We will assume a $450 net for each property). By the end of these 30 years, I will have made $4,860,000 in cash flow (Almost tax free thanks to depreciation!), I can now retire because I am passively making $162,000 annually through my real estate, AND my net worth has gone up tremendously because that same piece of real estate that was worth $50,000 on year one, is now worth $104,878 (If we assume a 2.5% inflation rate) in year 30. The house in year two is worth a little less, and year 3 a little less and so on... Our ROI in this situation is exponentially higher than if we would've just put some cash in a mutual fund for 30 years.
3) While you may have some control of your financial future through your 401k, I would claim that you can never have FULL control of your financial future unless you are analyzing every single investment that you are putting yourself into. What if your financial adviser makes a mistake? What if the market crashes when you need your money? These are all factors to consider when making an investment.
Lastly, I would add that investing in stocks that pay dividends isn’t always the best option. Warren Buffet himself would much rather invest in a company with good management, that could reinvest their capital gains back into their company (Thus preventing income tax from a dividend), than to receive dividends every quarter and give almost a quarter of his income to Uncle Sam! Buffet understands that analyzing every stock he gets himself into is crucial, and he would never blindly trust a financial advisor with his money.
I really appreciate your comment. Keep them coming, I would love to discuss more!
Hi James! Good article. I believe you said it right...what a person decides to do with a 401k is dependent on what their goal is financially. One other point with 401k's as is with mutual funds are the fees charged that ultimately take away from great growth.
ReplyDeleteThank you Brother Batista. Yes that is very true, those fees can really get in the way of profit!
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