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The Great Retirement Account Hoax
It could have been the relentless marketing by big Wall Street firms. It could have been the relentless cheerleading by CNBC. It could have even have been their only choice from their employer.
But it doesn’t matter. All that matters is most people have horrible results with their retirement plans – absolutely horrible. People have lost tremendous amounts of money due to investing in their IRA.
Since the year 1998, stock market returns would disappoint even the lowest expectations. These returns are even worse once you take into account inflation – I’d say they are embarrassing!
Here’s a handy tool from Moneychimp. It gives you the total stock market return over any time frame you like.
I choose the total stock market return for the last 14 years – since January 1998. The great thing about this website is you can account for inflation too. Adjusted the returns for inflation, you’re making 1.2% in the stock market! Those are horrible returns.
But here is the kicker –. Most people pay about 4% per year in fees for the IRA or other retirement pland and mutual funds they hold in them.
It’s horrible news.
Subtract 4% from the measly 1.2% returns of the last 14 years, and you’re losing money. You’d have been better putting the money in a mattress or using some of it to light fireworks on the 4th of July. At least you would have had a bit of fun once a year, and known it was safe the rest of the time.
Here are the sad facts. About 50% of the people in the United States work for small businesses, according to the Census bureau. And small businesses pay dramatically higher fees for their retirement plans and mutual funds. I gave a number of 4% fees – and this was being generous. Some many people pay fees as high as 4.8%.
Here’s an expert talking in the USA today about the crime of the small business IRAs:
“Small companies, because they lack negotiating power due to the few employees they have on staff, often have to rely on costly plan providers, such as insurance companies.”
“It’s a crime that they are extracting somewhere around 3.5% to 4.8%, which is the lion’s share of what the market returns on investments,” says John Sullivan, a registered investment adviser. “Workers end up giving away half of their retirement savings.”
Social Security is a Better Investment than the Stock Market over the last 14 Years
It’s almost impossible to believe, but you’d do better putting your money into a government program.
You’ve heard how Social Security is a bad investment? Well, it is. It’s a terrible investment. You’re only likely to make 2% on your money in Social Security.
But it turns out Social Security is actually a great investment compared to your most people’s retirement plans. Those 2% returns on Social Security are after inflation and after fees.
For most people, Social Security is a better investment in the stock market once you take into account inflation…Ouch!
In fact, Social security has outperformed the stock market by about 5% per year over the last 14 years.
I’ve made the case we’re in store for another 5-10 years of bad stock market returns in prior articles for Absolute Wealth. Sometimes, bear markets last for decades. The one after the great depression did.
So don’t expect some miracle rally to make it all better. It’s probably not happening in the next 5 years.
This is disturbing, depressing news for many people. However, it’s entirely possible to do better – to do much, much better.
How to Beat the Market in Your IRA
We can get better returns in the in your IRA just by taking advantage of Trend Following within your IRA.
It turns out with a small amount of work and some basic trend trading principles, you can make more money in your IRA than you have in the past 14 years. Not only that, you can make more money with lower risk, and lower fees.
We’ve had such a response from people complaining about their retirement accounts; we just had to do something about it. You can make more money in your IRA (and 401k’s too!) if you can do a few simple things.
First, you need to make sure your IRA and 401k fees are as low as possible. Fees are wealth killer #1: high fees usually equal poor returns. If you are paying high fees, get out of that program and go somewhere with low fees.
It’s worth the few hours of time it will take to make the shift. You will make the equivalent of thousands dollars per hour just by shifting to a low fee custodian!
When you do this, make sure you avoid paying the transfer taxes. Also, make sure you can invest in low fee ETF’s and have low fee stock transactions. There are several large brokers out there who are excellent low-cost choices. Consult with your advisor on these procedures and be careful to do it correctly.
Then, you need something more than buy and hold stock market. If you use Buy and Hold you get problems like 2008 where you lose 40% in a matter of weeks. Many people panic and pull their money out during these panic times, so they miss out on the recoveries.
But can you protect your wealth within a retirement account? Well, the answer is with a bit of work, and a bit of knowledge, yes.
It turns out using some market-action based rules and keeping your fees low, you can dramatically reduce the risk you face, while increasing the returns to your portfolio. I’ve included an example below in the SPY. The SPY is a popular, low fee S&P 500 index ETF – it’s cheap and easy to use in your retirement plan.
Using the techniques of Trend Following, you would have avoided most of the down ward move in 2008, and also caught most of the upward move in 2009.
Using this strategy can turbocharge the returns in your IRA. Using this moving average rule since 2000 would have nearly doubled your returns in the stock market. That’s fantastic!
But even better, the worst loss with this rule would have been about 5%. That’s the worst loss, not the smallest. The stock market lost 40% in 2001-2002, then 50% in 2008. Losses of this magnitude are absolutely terrifying.
You can go to ETFreplay and run your own back tests on Trend Trading Rules.
All of that worry could have been avoided using the techniques of trend following. If you want to find out more, please let me know – I can help put your IRA into overdrive, using ETFs within your IRA.
Your Friend in the Trend,