Comments on: The Mighty 401k Fights Back!

By: shaferfinancial

shaferfinancial — Mon, 04 Aug 2008 13:34:54 +0000

I will believe 401K/IRA mutual fund investing is the way to go when the data for the wealthy tells me that is where they made their money. So far, the people with the highest percentage in mutual funds are the least wealthy of the folks with a net worth of $100,000 or more (I know that is a laughable amount to call people wealthy, but that is where the mass afluent category starts). And when you get to the wealthy $1M or more or super wealthy $10M + their mutual fund ownership is tiny. I am always amused at how Wall Street interests always point out that the market returns 10%-12% or more when in reality folks that invest in mutual funds get 7-10% below market (Dalbar studies indicate an average return of 4.4% for the years 1987-2007 for example!)

Start comparing oranges to oranges instead of one theory (demonstratably false) to real estate.

By: The 401k revisited … « How to Make 7 Million in 7 Years™

The 401k revisited … « How to Make 7 Million in 7 Years™ — Tue, 29 Jul 2008 08:55:16 +0000

[...] 7million, millionaire, millionaire in training, money, Rich I’ve written a series of posts about 401k’s with the intention of encouraging each and every one of you to assess why you [...]

By: AJC

AJC — Tue, 15 Jul 2008 15:39:50 +0000

@ Andrew – actually, I am not recommending ANY investment … if you look closely, you will see that I NEVER do. What I may do, from time to time, is ILLUSTRATE using RE or stocks, or bonds, or business, etc. But, that is a far cry from RECOMMEND.

In this series of articles I am specifically NOT recommending RE over 401k, what I am saying is that diversifying and solely relying on your 401k will NOT make you rich. A more active investment (for EXAMPLE real-estate, or could just as easily be stocks, bonds, business, etc., etc.) MAY make you rich.

Finally, on the subject of timing: if the market is down this year, buy MORE not LESS … and, WAIT: 20 or 30 years should cure any small 2008 problems.

By: Andrew

Andrew — Tue, 15 Jul 2008 15:18:14 +0000

To agree with the premise that RE is the best investmentment, I have made over $350,000 tax free profit in fifteen years selling only 2 primary residences. I have paid about $450,000 in mortgage interest, taxes and maintenance fees (it’s a co-op) over those years, but I consider that “rent” and not necessarily the cost to make $350,000. In fact, not included in the $450,000 I spent is about $150,000 in tax refunds due to mortgage interest and RE taxes paid. Another way to look at it is I’ve made $50,000 in 15 years AND lived rent free the entire time! Contrast that with my 401k, while contributing about $225,000 pre-tax, I’ve lost about $100,000 in value. Thus, my 401k has “grown” $125,000 in 15 years, but at a cost of $225,000 pre-tax dollars. But, I write all this because I want to state that the 401k losses were my laziness and idiocy, specifically: I was too highly invested in corporate stocks. I think as anyone understands, to remain diversified it is ludicrous to sell your 401k and bet it all on real estate. Similarly, you should never be more that 40% invested in stocks, and that is combined 401k and personal holdings. The rest should be RE, bonds, cash and/or commodities. As it turns out, my 401k is only 11.5% (as of today) in stocks, the 88% bonds and cash. Honestly, I have been moving money since early June and losing a lot less on my 401K than those who keep the “recommended” 70-90% stock allocation. Anyway, I also want to emphasize the RE market has TANKED and my current residence has lost about $60,000 in value in the last 2 years – a MUCH BIGGER LOSS THAN MY 401K! Further, my 401k losses would have been even less had I diversified sooner. You would be a complet and utter fool to be solely invested in RE the last 2 years. In fact, since Jan ’08, gold, oil and/or sliver would have been the best bets of all.

My conclusion is that you are giving terrible advice to invest in RE instead of 401K. But, to recommend a 401K, I would also recommend to be heavy in bonds and cash, especially during this bear market. If you don’t own real estate, at all, do what I did. Withdraw $50,000 from your 401K and use it for the downpayment on something nice, that is how to diversify!!! This reduces your 401K exposure and gets you into RE with no risk, since you have to live somewhere!

By: AJC

AJC — Wed, 02 Jul 2008 16:48:11 +0000

@ Moom – The underlying point is this: as for ALL investments, do’t just blindly plonk your money in … run the numbers first! It is my theory that if you do, for many people the 401k will NOT be the answer that they thought it was … wow! Then what??? Keep reading this blog …

@ Timmers – you have just outlined a GREAT Making Money 301 (keeping your money once you’ve made it) strategy and helped to explain the old saying: “… the rich may make their money elsewhere but they KEEP their money in real-estate”.

By: timmers

timmers — Wed, 02 Jul 2008 14:07:02 +0000

As a person who invests in both 401k and Roth IRA as well as residential real estate, I have to also add one other Major argument for real estate as a retirement strategy. That is, if investing right and long-term, real estate is much more of a sustainable investment. That is, if you have held it long enough to pay down the mortgage, you simply can live off of the rental income. After drawing out the rental income for one year—guess what? It hasn’t gone down in price but usually up—at least maintaining parity with inflation if not more (sometime much more if you invest right). AND…(the best yet)….you still have the same amount of money available to you as the year before plus a little more (if you haver raised the rent). The problem with 401K investments is that unless you have enough to live off of the dividends (out of the question for the vast majority of people), you are drawing down your investment every year. It is not sustainable like real estate. Granted, you must maintain your residences, which is an ongoing cost, but a smart investor always plans for the major repairs/renovations and has money set aside for the smaller ones. To be honest, I am so tired of the constant 24/7 blather of the stock market investment complex that has its tentacles in every media outlet. They want to keep spinning a song that hasn’t produced for most mainstream investors the past ten years (but has for their jobs and income). I am grateful for AJC’s contrarian and no-nonsense approach to most of their blather.

By: MOOM

MOOM — Wed, 02 Jul 2008 10:38:49 +0000

In the US, when an employer will significantly match funds contributed to a 401k it will usually make sense to invest in it up to the match, especially if you change jobs often (but not so often as to end up without the employer contribution vesting) as you can if you want cash out the fund at that point (paying the taxes and 10% penalty). I’d like to see the numbers to show that that isn’t the case – it would have to be a pretty good alternative investment. Now that is very different to “maxing out a 401k” or “salary sacrificing to super” in Australia (maxing out is hard in Aus when the annual limit is $200,000-250,000). Those are much more debatable things. The big question is: “should you contribute beyond the match?” in the US and “should you make any contributions beyond what your employer contributes (at least 9% of salary)?” in Aus. And these questions have different answers too depending on your age.