[continued from yesterday]
Now, I’m not particularly proud of this … but, it is true … I have no idea how much is in my retirement accounts; and, I didn’t even bother opening my own 401k account as CEO of my last company!
Yesterday, I wrote about the costs that can build up in the ‘food chain’ of the investing world, showing that merely accounting for the cost-differential between a typical mutual fund and a typical low-cost index fund can account for 20% of the performance of your entire investment portfolio after just 10 years.
I also, mentioned that I don’t like any of these products (even low-cost index funds, even though I will recommend them to lay-investors), primarily because of lack of control and too much diversification (who ever got rich from diversifying?!) …
So, the second part of this post will, hopefully, tell you why I don’t worry about 401k’s and Roth IRA’s as well as address a question that I recently received from a reader who asked:
Any suggestions on a strategy to use for retirement accounts if you earn beyond the limit for a 401k and Roth Ira? I have no company match for a 401k … get hit hard in taxes and have discovered that there is an income limit to a 401k and Roth IRA. Any suggestions?
Well my simple suggestion is: don’t …
The only time that I invest in a retirement account is when my accountant says:
“AJC, you have too much income flowing in, we had better plonk some into your [401k; Roth IRA, Superannuation Plan, whatever]”.
Yet, using a tax shelter is saving money, and as yesterday’s post showed, even a small difference in cost can add to a big difference in outcome … so, what do I really recommend and why?
If you still have plenty of working years left, I don’t recommend that anybody invests inside their company 401k except to get the ‘company match’ (who can argue with ‘free money’… yee hah!)
I also don’t recommend that anybody – who still has 10+ years of working/investing ‘life’ left – invests inside any tax-vehicles (such as a Roth IRA) etc. UNLESS they can:
(a) Choose their investments, and
(b) leverage those investments.
By choosing, I mean the whole gamut of what we want to be investing in: e.g. businesses, stocks, real-estate, and ???.
Now, in practice, these 401k/IRA’s are limited, so if you don’t intend to invest in some/all of these classes of investment or you have so little money to invest that you can ‘fit’ the whole or part of your intended, say, stock purchase strategy into one of these vehicles then, absolutely … knock yourself out!
Therefore, for most people, it’s still possible that a 401k or Roth IRA can provide an important place in their investing strategy … simply because the amount that they have to invest is so small …
… even so, they should go ahead only if it doesn’t limit the scope of their overall investing strategy, hence returns!
And, we should all know by now that primary importance of your investing strategy should be set on maximizing growth unless:
i) You are within a few years of retirement, when you no longer have time to take risks and recover from mistakes), or
ii) Have such a long-term, low-value outlook that simply saving in a 401k will do the trick (in which case, invest to the max.).
Just remember, this blog and my advice isn’t for everyone … it’s only for those who need to become rich …
… which usually means getting into investments that:
1. You understand and love, and
2. You can grow over time, and
3. You can leverage through borrowings.
If it doesn’t meet all three of these criteria, I simply don’t invest!
Direct investments in businesses and real-estate are the investment choices of the rich because of these three criteria… stocks to a lesser degree (you can only ‘margin borrow’ up to 100% of these, so the amount of ‘leverage’ that you can apply is lower than for, say, real-estate) … and, Managed Funds even less so (you can margin-borrow only on some of these, and only from limited sources).
For me, the limits that tax-effective vehicles place on me, and the maximums that I am allowed to invest in them, automatically reduce these typical ‘tax shelters’ to a very minor position in my portfolio … so minor, that I allow my accountant to manage them for me, totally.
Remember, though, that they only became a minor portion of my portfolio because I followed the advice that I am giving you here when I was still early into my working/investing career!
Now, I hope that (eventually) you, too, will have so much money OUTSIDE your 401K that whatever is INSIDE will be insignificant for you … in the meantime, at least invest for the full company match.
Pretty controversial? Let me know what you think?