Blackman on Taxes
At Last, a Proven Solution to Fortify Your Company's 401(k) Plan
Do you own a closely held business, one with a self-directed 401(k) plan where each employee selects how to invest his funds, typically selecting among a family of mutual funds offered by the plan sponsor? If so, learn how not to lose your retirement funds to Wall Street and, more importantly, how to improve the economic health of the plan.
I am on the warpath to change a system that has long been broken; not delivered on its promises; and skimmed billions of dollars in unearned fees from 401(k) plans. Let’s start by dealing with the “buy-and-hold” myth touted by many self-proclaimed Wall Street gurus to investors. Following is a quote from an article titled, “A 10-Year Scam Called the Stock Market,” by Michael Lombardi.
“What a decade it’s been,” writes Lombardi…“The stock market is at the same level (nearly) today that it was 10 years ago despite interest rates falling like a rock since 2001. The majority of Americans who buy mutual funds in their retirement funds with the hope of seeing that money grow through the years have followed the worst possible strategy. Buy and hold for the long term—I’m not sure who made up that motto.”
Worse yet, when you factor in inflation, instead of your retirement funds standing still, the intrinsic value of the funds has gone down.
Now let’s dig a bit further into mutual funds. According to an article titled, “The Market Data Against Fundamentals,” by Douglas Davenport, “an annualized return from 2000 through 2008 for large-cap U.S. stocks show a market return of –0.27 percent…and the average mutual-fund return for the same period was a –3.25 percent.” Much of this loss is directly attributable to mutual-fund expenses.
Mutual funds are an expensive investment choice. Except in a long-term bull market, even the fund managers do not make money. Yet the current, crazy 401(k) system dictates that each 401(k) participant makes the investment decisions for his own account, regardless of their investment training and experience. A detailed analysis of how the typical self-directed 401(k) plan impacts the plan participants is nothing short of a national scandal. Each participant’s account gets charged two management fees: one by the plan sponsor and a second by the various mutual funds selected by participants. A rising market hides the sins of the fees. But a bear market or go-nowhere market (such as that of the past 10 years) causes the continuing fees to only exasperate the pain of investment losses suffered by plan participants.
It’s time for a change, in order to avoid employer liability, increase earnings to an acceptable rate of return, and still minimize risk. Here’s how.
Avoiding liability. It’s easy to do and the strategy is as old as the existence of qualified plans, including 401(k) plans. The owner(s) or trusted employee(s) become trustee(s) of the 401(k) plan. Then, the trustees hire a professional money manager.
Increase rate of return. I am on a constant quest to find and take advantage of new opportunities afforded by the best money managers—those that use a strategy that consistently accomplishes an acceptable rate of return, yet limits risk. Yes, I have discovered an investment manager with a proprietary strategy—known as “trend following”—that does the job. This strategy does not attempt to predict market or stock movements. Instead, the strategy capitalizes on natural market movements (the volatile ups and downs) when they occur. A trend-following manager takes advantage of what is actually happening in the market, rather than trying to guess what may happen in the future. (See my article in the March 2011 issue of MetalForming for more on this topic).
Trend following turns volatility from foe to friend. A trend is a strong, sustained move that can last from several days to a number of years. A trend may be rising or falling, and is applicable to any specific security or index, like the S&P, or a commodity such as oil, gold or the Euro.
The basic concepts of trend following are simple. For example, when the investment is gold and gold is trending up, the manager is long gold; if it is trending down, the manager is short gold. What if gold is flat? The manager stays in cash, temporarily. The beauty of trend following is that investors make money not only when the market rises, but when it drops.
As an example, consider trend-following results from a portfolio manager working with Sir John Templeton, managing a fund in an advisory firm owned by Sir John’s family. In 2008, when the S&P lost 37 percent, this manager’s trend following returned a rate of 29 percent. And, the annualized rate of return from December 2006, when the strategy was first implemented, to March, 2011: 18.5 percent.Want more information? Send a fax titled “Trend Following” to 847/674-5299 with your name, snail-mail address, e-mail address and phone numbers. Indicate the type of funds (401(k) or otherwise) to be invested. MF
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