Don’t look now, but many employee investment decisions are being made by… amateurs
by Steve SelengutMr. Selengut is a private investor and a contributing editor to LIFE&Health Advisor. He is the author of the book ‘The Brainwashing of the American Investor: The book that Wall Street does not want you to read.’ He can be reached at [email protected]
Smack, right up alongside the head, 401(k) investment programs deteriorate rapidly as the stock market and the economy weaken. Who would have thought that there was so much risk in those mutual funds and ETFs?
The pain is most often temporary, but the timing of the recovery could alter some participant retirement schedules and benefits— not to mention the hefty confiscation level you can expect from Uncle Sam.
The popularity of self-directed benefit plans is understandable. Employees typically get an instant profit from employer matching contributions, a variety of investment products to choose from, and portability between jobs. But the benefit to employers is huge — an easy, low-cost, employee benefit plan with virtually no responsibility for the safety of the investments, and no lifetime commitment to benefit payments.
In many instances, employees are required to invest heavily in company stock — a situation that has caused major problems in the past (Enron, for example).
A dangerous transfer of responsibility
401(k) plans have virtually replaced the private pension system, transferring total investment responsibility from trustee caliber professionals to hundreds of millions of investment amateurs. Employees get little unbiased professional guidance to help them select the right mix of investment vehicles from the glossies provided by 401(k) hucksters.
Few employee benefit counselors have degrees (or hands-on experience) in investing, and wind up using the “unbiased” counseling services of the funds’ salespersons. How convenient for them. Interestingly, most product salespersons have no hands-on investment experience either— go figure.
Similarly, the financial planning and accounting communities seem to have little concern about such basic investment tenets as QDI (quality, diversification, and income). QDI is the fire insurance policy of the investment plan, but few 401(k) participants hear about anything beyond past market value performance numbers, future performance projections, and the like. They are generally oblivious to the risks inherent in their investment programs.
This is where an understanding of investment grade value stock (IGVS) investing, and related market statistics becomes important to 401(k) participants, company benefit departments, accountants and other financial professionals. IGVS investing is just perfect for long-term, regular-deposit-commitment investment programs.
Somehow, we’ve got to get 401(k) investors to understand the framework of an investment/retirement program and, then, we have to get participants and/or their professional advisors to look inside the products being offered. As much as I hate the idea of one-size-fits-all investment products, they are generally accepted as the best way to deal with larger employer 401(k) programs — most employers don’t know that more personalized approaches exist.
It shouldn’t take a meltdown
Only when some form of company, sector, or economy melt down occurs, does the head scratching (and the investigating) begin. 401(k) participants need to understand that they are not immune to the vagaries of market, economic, and interest rate cycles. If they realized they had total responsibility for the long-term performance of their investment program, would they accept it? Are they in good hands?
Historically, investment grade value stocks fluctuate enough (both in general and by sector) to allow for mutual fund and ETF investors to select the less risky offerings from among the product menu — but all individual investors need to learn how to identify the risks and to learn how to deal with them. Typically, 401(k) participants buy last year’s best performance offerings and sell everything else.
Nowhere else in their lives do they adopt such a perverse strategy. And nowhere else in their thinking would they blindly accept the premise that any one number represents what is, or should be, going on in their personal investment portfolios. Risk minimization begins with quality, is enhanced through diversification, and is compounded with realized income.
The first two steps require research, greed control, and discipline. The income part just requires discipline, so it should be much easier to manage. If you cannot identify and understand the individual securities within an investment product, and assess the overall quality (economic viability and risk protection), don’t invest in it. If you have more than 5% of your portfolio in any one individual security, or 15% in any one sector (industrial, geographical, social, political, etc.), make some changes.
Since 401(k) plans are almost exclusively mutual fund shopping malls, it is difficult to assess the income or cash flow component of the risk minimization function. Product descriptions, or your benefits representative, should provide the answers. You can stay away from products that refuse to share the income with you, but the best way to benefit from a fund based benefit plan is to establish selling targets for the products you select.
If your Blind Faith Fund Unit Value rises 10%, sell all or part of it and move the proceeds to another opportunity that is down 20%. Profit taking is the ultimate risk minimizer.
So long as we are in an environment where retirement plan income (and principal in the case of all private plans) is subject to income taxation, 401(k) participants would be wise to establish an after tax income portfolio invested in tax exempt securities— or to vote more selfishly.
Investment Grade Value Stocks are the only equities used in Market Cycle Investment Management (MCIM)programs, and all MCIM programs have at least 30% invested for income. They are perfect for turning your 401(k) rollover into a viable, security transparent, retirement program without the the standard financial products. Google Market Cycle Investment Management for more information.