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Latest Dalbar Data June 15, 2016

Posted by shaferfinancial in Uncategorized.
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The latest Dalbar data is out, detailing the continue failure of the 401K/Mutual fund strategy for retirement saving.  This has been an ongoing series of datum, for over 30 years, that records what actual investors’ rate of return is over varying time periods [1,3,5,10,20 and 30 years].  The data has been recognized as similar to internal data produced by the largest mutual fund companies.

It is a really simple story.  Although this data is created for producers, and is slanted for them to not take responsibility for the results of their advice, this year there is a discussion on the “psychology” of investing, better  known as behavioral finance.  There is still a misunderstanding on what the behavioral finance scientist tell the industry.

They still call folks who react to market moves, up and down, irrational.  That is folks who sell when fear has pushed the market down or buy when the market is buoyed by exuberance are described as irrational.  The misunderstanding is in two points:

  1. Our brains are hardwired to react to fear in a “flee or fight” mode.  That is exactly what is rational to do when faced with a saber tooth tiger.  So what the mutual fund industry really wants you to do is irrational and goes against how our brains are hardwired.  This, of course, explains why people in general don’t follow the advice of these buy and hold mutual fund sales people.
  2. There is no evidence that the advisors themselves are able to overcome the way their brains are hardwired and not make the same mistakes in their own lives.   The industry does try to “encourage” advisors to convince people to buy and hold by tying their compensation into how much total money they are managing, but this has not proved to be capable of stopping people from their fear response.

So having pointed all this out [for the umpteen time in this blog] here are the results:

For the last 30 years the S&P 500 benchmark index has returned 10.35% while the individual investor in equity funds over those 30 years gained, on average, 3.66%. Investors stayed in their equity funds for an average of 4.1 years before selling out.

The numbers are a little better when you lower the time span down to 20 years with S&P 500 benchmark averaging 8.19% and the individual investor averaging 4.67%.  This better performance is easily understood because the most damage is done during years the index goes down significantly which hasn’t happened since 2008, a full 1/3rd of the 20 year time period.

For those investing in asset allocation funds and fixed income funds the returns are even worse at 1.65% and 0.59% 30 year returns respectively.

So what does this all mean? Again, this means that the strategy of investing in mutual funds within or outside of  a 401K wrapper is a strategy that is unlikely to create enough wealth to fund one’s retirement years, unless you are the lucky few that either has a large enough income to push large amounts into the mutual funds and/or you have “Buffett like” ability to ignore market movements.  And, of course, this also means that your interest in creating a well funded retirement goes against Wall Street’s interest in having you invest in stocks [mutual funds or individual stocks].  The individual is left to deal with either a failing Wall Street pushed strategy or figure out a different strategy in the face of massive amount of propaganda for the mutual fund industry.

The sad thing about this state of affairs is that the people who most need to find an alternate retirement strategy [the middle class], are so fully propagandized by the mutual fund industry that they almost never can see alternative strategies without reacting to the negative propaganda put out on EIULs and Investment Real Estate.  My clients tend to be up the ladder from the middle class is both income and education and especially adept at mathematical concepts.

My most common question?  Why don’t you hear about EIULs or Why isn’t this more commonly done?  The second most common comment?  There is a lot of negative comments on the internet about EIULs.  The next comment is usually, “this makes so much more sense.”

So to all those folks out there who haven’t been able to pull the chain on an EIUL yet, I say, put 3.66% into all those retirement calculators and see what the potential value is at retirement age and multiply that number by 4% [even that number is found to be to aggressive], the suggested amount you can take out yearly to make your retirement last until death.  Now that you have gotten off the floor, you might want to give me a call!

 

 

 

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Comments»

1. James McCarty - June 15, 2016

I’ve subscribed to your blog for quite a while. I made a call to Jeff Brown probably 2 years and he encouraged me to contact you. What is the best way to start a conversation? Thank you,

James McCarty

Sent from my iPhone

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2. Joe Taxpayer - July 9, 2016

Jack Bogle is my financial hero. The concept of an index fund was ridiculed at first, but in hindsight, it’s brilliant. With the data for 30 years of S&P returns vs the returns of typical investors, I’m happy to have lagged by less than 5 basis points. My 401(k) fees have dropped over the years until I found we are using VIIIX. 2 basis points for the last decade or so, and before that, just 4 in a different level of Vanguard fund. Again, in hindsight, my choice to go plain boring has paid off, beating the average investor who has yet to get the message.

Nice article.


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