Sounds like something Troy McClure might be selling.The catalyst for this post is an article from the WSJ yesterday about 401ks. No shock, many people are down a lot of money in their 401ks. Being down a lot can cause disillusionment, again no shock.
It has been a while since I have had a 401k (1099 means picking some sort of self employed retirement vehicle) but from what I read, employers still match a portion of what employees contribute (save for a couple of companies that are not matching for 2008).
This might whip a few people up but I am pretty sure I have mentioned this idea before.
If you get a 50% match on your first, say, $8000 or $10,000 or whatever then why put that $8000 or $10,000 or whatever into anything but the money market choice? You are already getting 50%, why mess with that? There is even an argument for getting a 50% match on the first $8000 but putting in more than the amount needed to max out the match and still just putting it into the money market. If you put in $12,000 into a 401k and get $4000 from your employer then you have a 33% return with no investment risk.
If you have a career of normal duration getting 50% a year on your 401K in the manner described above you'd probably be in good shape when retirement comes.
Investing in riskier assets then would come into play with excess savings (maybe not the best term) beyond where you get the maximum benefit from your employer match. If you put $8000 into the 401k (get a $4000 match) and can squeeze out another $8000 into something (max out an IRA of some sort that would be compatible, or even a taxable account if that is the only choice that can work for you) with more choice than a 401k and average 8% per year there over the long term you'd be in even better shape.
At the very least this might get you think before you go hog wild with risk in the 401k. Let me say I do not think it will take anywhere close to ten years for the US stock market to get back to the 2007 high but if that is wrong then people who are 55 today, down a lot and hoping to retire at 65 may have a big problem. If you are younger than 55 you may confront a similar problem when your time does come. If you can get a 50% return (via the match) on a big chunk of your savings for another 20 years how much risk do you need to take?
32 comments:
Heh. 50% match on the first $10k. Man, tell me what company that is 'cause I am THERE.
Ok ok, I know it was just an example.
If you get a 50% match on your first, say, $8000 or $10,000 or whatever then why put that $8000 or $10,000 or whatever into anything but the money market choice? You are already getting 50%, why mess with that? There is even an argument for getting a 50% match on the first $8000 but putting in more than the amount needed to max out the match and still just putting it into the money market. If you put in $12,000 into a 401k and get $4000 from your employer then you have a 33% return with no investment risk.
If you have a career of normal duration getting 50% a year on your 401K in the manner described above you'd probably be in good shape when retirement comes.
Compounding of gains??? I'm pretty sure you were NOT implying this, but obviously 33% or 50% or whatever on a yearly contribution isn't the same thing as a 20% CAGR (obviously not achievable unless you are the next Warren Buffett) over 20-30 years. If risk-free is 0% for the next 5 years, or even 10 years (I don't think one should underestimate the Fed here) then it doesn't take much of CAGR with compounding to probably beat getting 33% on just a yearly contribution.
I think it really just comes down to how much money do you want to accumulate, and how much risk are you comfortable with, and how much are you willing to save.
If you want to be "comfortable" save an ABSOLUTE ****LOAD of money, and take little to NO investment risk (of course that would shrink the client pool for those of us who manage OPM, anybody can do a CD ladder on their own). If you want to be really rich, you are going to have to go out and take investment risk because it is the geometric compounding that gets you there, not getting a 50% match on 5K, 10K or whatever.
I'd also like to add, FWIW, it's not free money. As a small business owner, when I hire, I have a set amount that I can afford for an individual. This includes salary, benefits and taxes. I tally that figure and ultimately it all comes off the salary. So if you want to call that "risk free" money, I suppose you could. The money has to come from somewhere.
Roger- please read and advise your opinion. You may want to read today's post by mish and bring this issue up at the Index Universe conference you are attending. Mish explains the drop in S&P estimates throughout 2008 and how this will continue into 2009 and that based on CURRENT estimates the p/e is 20+ for 2009. Needless to say we had our bear market rally and now expect the market to wind down to the 400-650 level. Look out below!!!
http://globaleconomicanalysis.blogspot.com/2009/01/is-stock-market-cheap.html
BillB, is there a way that the employee could say just give me the money and I will take care of all of the expense? if not, then it might be "free."
anon, i don't think much of PEs predictive value. this might make a good topic for this week's video but you won't like my answer if you are the same person who has posted this opinion by Mish before.
I like Mish, but I think he is wrong about using PE at a bottom like that.
What if earnings go negative one year? Should you pay some one to take the stock off your hands?
It does sound like a good topic for a video. All that said Mish predicted the problems we are seeing better than most, but I still do not like his use of PE here.
Another guy who likes Mish
not casting a stone at Mish, he is a regular read and is right a lot, i just don't believe that PEs offer any predictive value for the market.
they allow for stock vlauation only--IMO
I'm not sure I fully understand the question. But I'm saying a match in a 401K is not free money. Let's say I "match" 5K per year. I'm likely offering 5K less on a salary to make up for that. So did the employee truly make 50% with no risk? It's the same way for health insurance. People come in and ask "hey, if I get on my spouses insurance, that saves you x dollars per year, can I just have that in my salary?" ... to which I say "sure, no problem.".
bigger companies do not say "sure no problem." salaries are not negotiable in the manner you say for your small comapny. You can't go to Fedex and say can I have the money instead.
Mish is talking estimates, not actuals. So, it's simply another prediction.
Emphasizing the savings aspect of a 401k, with qualifiers as MikeC and BillB note above, is probably useful -- at least it keeps expectations within bounds. Based on what I've read many 401k plans are rather poorly administered with an impoverished selection of allocation options and high, annuity-like fee structures (often difficult to locate) on top of expenses.
With more expensive plans, and assuming the matching funding were considered sufficient to make the plan attractive as savings, I'd guesstimate putting everything into the plan's money market sub-account would probably result in real-term loss so maybe better to allocate to a sub-account with a slightly higher yield, a short-term investment grade bond option or something akin, with possibly a small percentage sub-allocated to the highest yielding equity sub-account(s) available, maybe a REIT or growth-income vehicle.
AFAIK the law(s) require a separately administered plan and do not allow a direct, tax-deferred allocation to the employee under any circumstances but if a business were smallish one could pass on the 401k and establish a SEP IRA for employees (and the boss) at a big mutual fund outfit like Vanguard or Fidelity which could take care of virtually all the objections: Low fees and low expenses, good regulatory oversight and ease of administration, lots of good (some very good) allocation options.
I run a SEP IRA and a couple other smallish plans for family but claim no wide expertise here so JMO FWIW.
Roger,
Your losses in 2008 were 20%?? The greatest minds in the industry did worse then you. I must take my hat off unless you are fudging a bit - lol. I had thought since some of your markets you were in were killed that you would have been lucky to have lost 30% and that was mitigated by having some cash on the side.
It's a match not a return.
I see no reason a match should change whatever your investment goals are.
if you watched the video i thought i was clear about having a lot of cash and using the double short for a while. owning a stock that goes down 60% is not as important as how much of that stock you own.
ROGER,
EVEN IF YOU ARE FUDGING A LITTLE AS NO ONE ON THIS BLOG EVER ADMITS TO LOSING MONEY. A 20% LOSS IS PROBABLY BETTER THEN 99.9% OF THE SUPER PROFESSIONAL DID TO INCLUDE BUFFET AND SOROS.
Roger,
Naturally. Being a small company allows that flexibility, but my point is, the money comes from somewhere. I use the same argument when someone refers to the "employers share" of social security. Sure, I'm writing the check to the government, but if I weren't, it would be more I could offer in the form of a salary.
While it can't be tracked dollar for dollar as in my example, you'd better believe a Fedex knows the total cost of an employee. A match is just another form of compensation. I don't consider it a "return on investment".
Roger - I think being self-employed has made you lose touch a little on this issue. There are very few companies left that have generous matching programs; most small companies have none whatsoever.
i wouldn't doubt that for a second
Roger,
Off topic, but other than utilities can you suggest some ETFs that have high dividend yield that you like. I am looking for greater than 4% yield with reasonable growth potential. I am not sure the percentage of my portfolio I want to allocate to higher yielding ETFs, but based on a 4% with drawl rate I thought these would be easier to hold through difficult markets.
BTW I am not looking for highest yield as I do not want to ignore growth. For example I like VWO. I think it has good growth potential even if the dividend is not super stable through a difficult year, but over the long haul I think it will be stable and a good growth potential even if I shouldn't put to much into that etf.
Roger, I think the 50% match amount "given" to you by the employer is in reality part and parcel of your salary, but, hidden, so to speak, in the form of this "benefit". For identical jobs,at another employer who does not offer to match, the salary would be higher. Thus, you need to go for higher return at the matching firm to keep up with the higher salaries at the non-matching firm. Does that make sense? That being said, it either does or it doesn't and I'm not saying it does, but it could.
I work for a mid size(2000 employees) midwest based ag chemicals( fertilizer) company with an average benefits package. We receive a match of 6% on the first 6% of savings, plus 3%. You end up with 15% savings with 6% invested. I have followed your logic and kept the money as my cash allocation, even though it is a Vanguard account with a fair number of well regarded low fee funds. The return has been about 4% a year on the money market account. This company did phase out a pension plan for new hires several years ago. I don't think this is an exceptional plan(good or bad) for an industrial company, based on my discussion with industry peers.
can't pick an ETF for you. what I would say is pick the part of the market you like first, be it narrow or broad and then pick the be best way in for you--none of this would, IMO, be a substitute for a properly diversified portfolio.
Mish explains the drop in S&P estimates throughout 2008 and how this will continue into 2009 and that based on CURRENT estimates the p/e is 20+ for 2009. Needless to say we had our bear market rally and now expect the market to wind down to the 400-650 level. Look out below!!!
This argument is flawed for multiple reasons which Hussman has addressed numerous times.
The value of a stock (or the entire market) comes from ALL the future earnings over many, many, many years (your standard DCF model) not earnings just 1-year into the future. Uber-bears arguing the market is expensive based on ***TEMPORARILY*** depressed earnings in 09 and 10 (go back and look at 2002) are making the EXACT SAME MISTAKE that permabulls were making arguing stocks were cheap in 07 based on UNSUSTAINABLY high earnings. If you don't normalize earnings, you are going to draw the wrong valuation conclusion at both tops and bottoms.
Additionally, there is little to no correlation in 1-year stock returns versus either P/E ratios or earnings. I always wonder if people actually look at the historical data before making certain claims.
Having said that, I think S&P 600 is a possibility for technical and sentiment reasons that have nothing to do with P/E ratios or earnings in 09. Mish may very well end up being right for the wrong reasons, but for all the uber-bears I suspect many if not all will miss the ultimate turn and market recovery and be on the sidelines long after the bear market is over.
Roger,
Perhaps I am missing the point of this post re: company match.
I see my company match as a part of my income stream. It goes into the pile called my portfolio (the tax-deferred part of this pile) and I try to protect and grow this pile so that it will be enough for me and my spouse to retire on.
Why should this part of my income stream be automatically allocated to money market?
Unfortunately, if I leave all my pile in money market - it will not be big enough and I have to invest some of it in riskier/higher growth investments like stocks.
On my part I have chosen to invest part of this company match income stream in an inexpensive S&P 500 fund in my 401K.
I actually like the fact that during this bear market I keep accumulating and buying into the market at a relatively cheap price.
I keep other parts of my portfolio in cash/money market - I prefer to do so in the taxable part of my "pile" since I can get better interest/yield than the very limited choice in my 401K and there is also less gains in cash/money market than in stocks (generally speaking, long-term, of course...) so I pay less taxes upfront.
So, for me, the equation company match = money market does not work. Its a question of tax efficiency and I prefer other parts of my portfolio to be in money market.
Thank you for sharing your wonderful expertise. I find it extremely helpful.
SA.
the post is intended to just stretch the thought process about risk out a little bit.
If you put money into a 401k, assume no match for a moment, how much return will you get on that money in a normal asset allocation?
Now factor the match in. One way to think about the match is as a return on what you put in. If you put in $8000, a $4000 match could be thought of as your return.
Roger, GREED causes many speculators masking as investors to foul their pension assets with an inordinate allocation of high risk investments.
The current economic distress and the exposing of gross investment scams will force the sane investor to pause and think twice before throwing monies at a scheme in the foreseeable future.
Old Marty Zweig and his lengendary "Don't fight the Fed" and "Don't fight the tape" are two maxims many have failed to follow. Somewhere north of all of us, Lou Ruykeyser, Marty's good friend, is winking.
T
until "we" get lulled into a false sense of some new paradigm in the future
"We work on contingency, no fees".
Wait a sec, punctuation is wrong.
"We work on contingency? No. FEES!
Speaking of Mish he is on a roll today. Attached is a link to his latest elliot wave count. His absolute return fund went back to a market neutral position two days ago and expects the wave 5 down to be long to the downside. He does indicate that the sucker's rally could still rebound to 1,000 however suggests that is very unlikely now. Not good folks.
http://globaleconomicanalysis.blogspot.com/2009/01/s-500-crash-count-wave-four-triangle.html
I don't know why there is so much pushback on this. The match, for all intents and purposes, is free money given to the employee, FROM THE EMPLOYEE's POINT-OF-VIEW, therefore this can be thought of as the employee's return on that portion of his 401K contribution. To the employee, it matters not a whit where/how the employer came up with the funds to match with.
Mike C
That was a really good post on the subject, thank you.
OG
Hear hear T, well said.
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