Category Archives: mutual funds

Does your 401k company match have a dollar limit?

An interesting thing has happened today: my company sent out an update on it’s 401k policy. They have increased the dollar amount of the match they ate willing to make. If you read the first part of portfolio rebalancing, you are aware that I’m no longer investing any money there. Since I made that choice, I see such enticements through a different lens. I appreciate the generosity my company has extended, but it’s important to realize companies aren’t successful because they are benevolent and generous. It is more likely a need to stay competitive with other companies and what they are offering. There are probably tax benefits as well to consider from their perspective. There is nothing sinister or wrong about this. It is simply business, and all active financial planning done on your part requires that you think like a businessman.

Did I mention active investing? When I joined my current company, I took a passive approach. I picked a handful of mutual funds from a list, and spread my contribution among them. There was no in depth analysis. Frankly, I didn’t think I needed anymore. Instead, I assumed (as I had in the past) that the mutual find manager would fo his jon and earn me s good retirement. I didn’t realize how passive and wrong I was at the time. Another dimension of passive investing was the fact that I wasn’t aware of the limit of the company match. While they will match a certain percentage, there is a hard limit in dollars of how much total match. Guess what? I exceeded the limit. Even with this new increase, I still can’t get the full percentage match. This all makes for a very manageable situation for my company. They can go to the shareholders and give a very concrete listing of the maximum liability they have in 401k funding.

This is very different than the old style of managing pensions. Instead of managing the complex and unpredictable risk of a pension fund, they can simply add up the number of employees and multiply it by the dollar limit for each year. The rest is, as they say, up to us. If you assume your 401k along with a passive investing strategy will carry you to a comfortable retirement, you’re in for a shock. I have been saving money in my 401k for 15 years. When I started back then, I maxed out to the tune of 15%. At one point they raised the limit, and I pushed it up to 18% (the IRS dollar limit). I did that for years. Then one day, I looked at what was there and realized what was there wasn’t growing fast enough to beat inflation AND fund a comfortable retirement for 20+ years. This is what allowed me to break away from the propaganda of Wall Street and it’s message of the stock market always rising.

I was listening to Dave Ramsey today while driving, and for the nth time heard bim throwing out the same “grow your mutual funds at 12%, withdraw at 8%” gibberish. Mutual funds average 7% with wide swings. In fact going back to 1951, the S&P 500 has swung from between 5.15% and 10.05% over any given 30-year period. Mutual funds  tend to underperform this index, so expecting 12% is ridiculous on its head.

Advisors have been telling people to withdraw no more than 4%. Factor in that this must be based on the roller coast value of your portfolio and NOT on some average (to avoid dipping into the principal), and you must realize your mutual funds are just too risky with their horrendous track record to be your primary venue of retirement. I don’t have anything against my company. It’s just important to understand that what is best for you, your company, and the IRS do not often coincide.

UPDATE: Cross posted at, the place where I now post all wealth building opinion.

I am not a licensed financial advisor nor an insurance agent, and cannot give out financial advice. This is strictly wealth building opinion and should be treated as such.

Go anywhere funds that really go nowhere

I chuckled as I saw an article today posted on titled “5 funds that ‘go anywhere’ for a smoother return.” It involves a new “type” of mutual fund. They are called ‘go anywhere’ funds, meaning the fund manager isn’t constrained to the usual set of restrictions, like only investing in certain types of asset classes, or adhering to a certain proportion of stocks vs. bonds. Some of the quotes are really quite telling.

“The so-called Lost Decade proved that we don’t need to rely on large equity allocations to seek meaningful returns,” says Rob Arnott, chairman and founder of Research Affiliates and manager of the PIMCO All Asset fund (PASDX), noting many investments, including high-yield bonds, emerging market debt and commodities, offer equity-like returns. Yet, because of the complexities of these assets, there’s value in having an expert calling the shots on when to move in and out of these alternatives.

Is it just me, or is this manager now telling us that asset allocation doesn’t work? Not wanting to put words in his mouth, let’s see what another manager quoted in that article says:

Because the funds potentially can go anywhere, they may throw a wrench in your overall asset allocation but “that’s not always the worst thing,” says Waddell, explaining there are times when it pays to have a good manager making big-picture calls on your behalf. Still, it’s not a bad idea to see how such a fund will mesh with your other holdings by taking a look at the manager’s track record and current holdings.

It seems both Arnott and Waddell are telling us that it wouldn’t be the worst thing if the fund manager was able to go out and simply pick what is best and had the best deal. From 10,000 feet, it sounds like the same approach taken by Warren Buffet. He seeks out companies that are different sectors, ranging from insurance to jewelry stores, to shoe makers, to brick manufacturers, to carpet makers (and that ain’t the half of it!) But people none-the-less keep throwing stones at Warren Buffet even though he consistently beats the S&P 500.

Looking towards the bottom of the article, I notice a matrix showing the performance of five such funds. Strangely, they didn’t list all the ones actually mentioned in the article. I guess it is only the “go anywhere” funds that are sold by Fidelity. Though they mentioned 10-year returns in the article, I only see 1, 3, and 5-year annualized returns in this matrix. Why is that? Is the 10-year performance not too hot? Well the best one only sports an 8.23% 5-year return. With a 0.76% expense ratio, it would appear that my total gain (before taxes) would be 7.47%! Subtract 30% in taxes (5.23%) followed by by 4% inflation, and all you get is 1.23% gain. Not too good for long term wealth building in my opinion! Not to rub salt into your wound, but the article touts that these funds are doing better than 85-95% of the other mutual funds. Yikes!

And why are they coming up with these new strategies? Because the other ones crashed and burned over the last decade! People jump ship when mutual funds nose dive, so the Wall Street salesforce needs to offer something “new and exciting” that people are willing to buy, causing a reaffirmation of our human nature to sell to stop losses, i.e. sell low, and then buy on the upswing, hitting the high point, and killing our overal wealth building performance.

Bottom line: if 1.23% gain is what I have to look forward to, then you can count me out of trying use mutual funds to build my retirement wealth. But let’s at least adhere to the tail end of the second quote: “it’s not a bad idea to see how such a fund will mesh with your holdings by taking a look at the manager’s track record and current holdings.” Indeed, let’s check what the managers track record looks like over a 20 year period. Because that is the traditional time window we really have.

UPDATE: Cross posted at, the site where I now post all wealth building opinion.

I am not a licensed financial advisor nor an insurance agent, and cannot give out financial advice. This is strictly wealth building opinion and should be treated as such.