In spite of what actually happened during 2000 and also 2007, many seem to be having the typical investment vehicles, including 401K as his or her primary investment means (I'm definitely disturbed to discover just how many expert to be individuals coming from investment / money site nevertheless think 401K is path to acquire good wealth). For me personally, I'm not investing in penny in 401K (I previously used to but is not any longer...) mainly because there is practically no advantage for making use of those as great investment. Worse yet, these kinds of investments really are worst as well as riskiest investments of all. For this specific post, I'll discuss my own thinking of the main reason why investment like 401K would be the most terrible investment and ought to never invest any cash into it.
Reason 1: Today's global financial future
If we look world wide, eurozone is without a doubt edge of go into default and other developed countries likewise following the very same way. There is going to be another Lehman moment within this year just like 2008. Stock market crash that brought on by euro sovereign debt turmoil can destroy many of individuals life saving and also investment. This is definitely inevitable. Mass-produced financial advisor will probably indicate to ordinary people that you need to diversified the portfolio so that you can reduce the risk. But, That is not really diversification in any respect. True diversification requires you to diversify across each of the asset classes such as stock, real estate, commodities and also business. So what most people are doing is actually to purchase each of the fund randomly just as if we're betting all of the horses at horse racing with no thinking about which one will win. Regardless of whether persons adequately diversified his or her 401K portfolio, stock is still stock and all of these mutual funds including 401K simply cannot prevent from the systemic stock market crash for the reason that each of the stocks is going to fall just like a rock when it takes place.
Reason 2: Paying highest tax (In the case of typical 401K)
I'm not talking about mutual fund here but strictly speaking about conventional 401K. "Deferring the taxation in order that account is going to compound more quickly resulting from power of conpound interest!". That is mass-produced financial advisors would tell those who are insufficient financial education. On the other hand, what they won't tell those people is that persons putting money in 401K will have to pay maximum tax possible in the end. And, in this state of economic climate, what do you think tax will go? Tax will undoubtedly go up down the road (Highest tax in America was 97%. Simply for your information). Those that keep putting money in 401K will be very disappointed how much the government will take his or her money at the end.
Reason 3: Very illiquid
The next typical sales speeches from financial advisor is "Your current company will match your contribution so that you may want to put more money". In essense, it's true. On the other hand, once we invest in 401K, we can not pull away your fund until 59 and half years old unless quitting the employment or serious emergency circumustances. This is definitely major minus. According to the John Williams from Shadowstats.com, existing inflation rate is 12% (Absolutely not number from uncle sam, uncle sam always manipulate the number with phony scheme). In the past, mutual fund is paying near 8%. In other words, we will be guaranteed to lose 4% every single year on average. However, can't move the money around before the certain age. We cannot even make use of these money from 401K even though great investment chances come to our way.
Reason 4: Fee and expense
Fee and expense for many of the 401K as well as mutual fund are really costly. Typical expense ratio of such funds are generally 1 - 3%. Therefore, it looks like very low cost. But, it is further from the facts. The more money and also more time we keep, the more it will cost us. Expense can increase up to 70% of total account value as we store like 40 to 45 years. Lots of regular financial planners yet another sales techniques might be "Utilize your compound interest for your advantage". However what they never show you is the fact that there is compound expense. The more money you keep and more time you hold, the more dollars will be taken out as an expense.
My main fear on this is not expense per se but opportunity cost associated with investing in 401K. Suppose that we're not putting the money into 401K instead investing in other investment opportunities which provide greater rate of returns, simply how much we all lose as a result of putting the money into 401K or some other conventional investment? That can be extremely substantial depending on skill level of investors.
Reason 5: No control
With 401K, generally there is hardly any control over the fund itself. Only thing we are able to do is to move from one fund to the next. In deals such as real estate investment, we are able to literally speak with the property manager or some other vendors to improve or switch the situation quite quickly however it is impossible for people to say to fund manager how to proceed. Even worse, imagine if fund manager himself doesn't have much knowledge about this current economy? In my view, most of the people put money into investment vehicles that absolutely no control or very little control over. Have you actually thought precisely why banks bring bucks to invest in real estate property and never lend cash to invest in mutual fund or 401K? This is due to zero control over. That is way too risky for the banking institutions to loan the money for the project that's virtually no control over.
Reason 6: Virtually no protection at all
Assets for example business and real estates can be protected by insurance that ultimately protects the loss whenever something goes wrong. However, there is absolutely no insurance of 401K. If we visit the insurance office to inform broker if there is insurance coverage for 401K or mutual fund, they'll be laugh at us and definitely say "Absolutely no". Anytime we lose all things in 401K or mutual fund, we'll lose the whole thing we have ever have and mutual fund or 401K businesses will take all the money. In my opinion, this is extremely risky.
These 6 reasons verify me that investing 401K may be the riskiest thing individuals can possibly do. It is total madness to actually put money into financial product that
1. Pay highest tax - even lose only good thing about the stock investment: capital gain
2. Highly illiquid - just can't withdraw investment till very late
3. Very high expense (accumulated expense)
4. Virtually no control over
5. Zero protection
6. 100% exposure to the systemic risk
Nonetheless, many people are believing this is the way to wealth. I really feel just unfortunate to see most people lacking financial education. In the future, I am afraid that millions will suffer his or her life saving resulting from what's imminent. I do hope that more and more people will receive financial education. so that they can invest his or her funds a lot more intelligently than only speculating their money to riskiest asset of all. In final thoughts, I will say it one more time with Warren Buffett's quote "Wide diversification is only required when investors DO NOT UNDERSTAND what they are doing".
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Takeshi "Ken" Yashima is an investor as well as a wealth strategist. His financial education website shares his insight about the current global economic situation as well as the current investment strategies to investors and his subscribers. Download a free E-book and special report at www.takeshiyashima.com
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