Here and in the next posts I present you with a few of the reasons I find most conventional investing to be downright ludicrous, and how I see things differently:
No Immediate cash flow
Retail investments are based on a “set it and forget it” mentality. Sock money away into something you don’t really understand, and let it sit for decades before you touch it. Hopefully, in that time it has grown beyond what you’ve contributed. Then you withdraw cash for retirement.
Financial institutions want your money. They want it on a regular, systematic basis and want to hold on to it for as long as possible with penalties imposed for early withdrawals. If an investment isn’t intended to give you immediate cash flow, it’s rigged in favor of financial institutions. There are much better investments that give you immediate cash flow so you can accelerate your 5 Day Weekend lifestyle.
A report on CBS’s 60 Minutes show asked of 401(k)s, “What kind of retirement plan allows millions of people to lose 30-50% of their life savings just as they near retirement?”
Good question. Unlike other investments that are protected from losses, your 401(k) rises and falls with the stock market where you have absolutely no control. Retirement planners will tell you the market averages 8%-11% returns per year. That may have been true last century, but this century has seen that turned into a fiction. From 2000 to 2015, the market was up just 8.4% total when adjusted for inflation, or 0.56% per year, and that was after a substantial market rally. Do you want to live your ideal life only if the market cooperates?
So, 401(k)s are just one example of many conventional “investments” over which you have very little, if any control. How much control do you have over the performance of mutual funds, for example? Any investment that doesn’t enable you to personally add value and directly influence the return is something you should stay away from.
Financial advisors and pundits are notorious for using hypothetical scenarios to sell you products. Consider this example from author Richard Paul Evans: “Remember, if you are able to save just $100 a month and you faithfully transfer it to your nest egg, in 40 years (compounded at the average S&P 500 rate of 10.2%) that little extra saving will be worth close to $700,000!”
There’s a glaring problem with this example, and many others just like it: It glosses over the fact that, in order for it to work out this way, you have to get a steady, year in and year out, 10.2% return. But that’s not how the market works. The market goes up and down. An average return of 10.2% is far different than a steady 10.2% return.
Lack of Liquidity
Money in a 401(k) is tied up with penalties for early withdrawal unless you know how to safely navigate obscure IRS codes. This means you can’t spend or invest your money to enrich your life without great difficulty and/or taking a big financial hit. The only exception allows you to borrow a limited amount of money from your 401(k) if you promise to pay it back.
This automatically leads to double taxation and a slew of other negatives, the worst being if you lose your job or your income dries up, the deal changes and you must repay the loan within sixty days.
The theory behind 401(k)s is you keep putting money away, where you can’t easily touch it without penalty for 30 years, and it will compound into enough to retire on. We’ve seen why you should be suspicious of that story. Compounding charts don’t look the same at 0.56% annual returns.
But here’s the other problem: Money left to compound unpredictably for 30 years is stagnant money. There’s no cash flow ready to direct to today’s best uses. Instead, it’s sitting still inside one 30-year bet, while newer, better opportunities may be passing you by. What happens if you find a real estate deal that could make you $30,000 in 30 days, but you can’t buy it because your cash is locked up in your 401(k)?
Retirement planners, reactive tax preparers and pundits love touting the tax benefits of 401(k)s and IRAs. But these standard investments are tax-deferred, meaning you avoid paying taxes to- day by committing to paying them later. Taxes are historically low compared to the days of 50, 60, or even 90% marginal rates of the past. Chances are, with record national debt, taxes are going up. If you don’t like paying taxes today, why would you want to pay more taxes in the future?
It’s ironic that people anticipate that they’ll have healthy re- turns on their qualified plan while at the same time figuring they’ll be in a lower tax bracket at retirement. If you have achieved any measure of success, you should actually be in a higher tax bracket at retirement. Most advisors, however, assume the opposite. Even worse, those higher tax brackets are likely to be even higher and more daunting in the future.
The tax deferral aspect of the 401(k), which is touted as a great boon, is actually a primary factor contributing to its underutilization. When the time finally comes to enjoy or live off the money, retirees are incentivized to let the money sit for fear of triggering burdensome tax consequences.
Other conventional investments, such as mutual funds, give you no tax benefits at all; you have to pay taxes on all your gains. The more sophisticated investments I use enable me to take advantage of IRS codes to defer taxes indefinitely or even get access to tax-free growth and tax-free withdrawals on the back end.
I continue in this fashion in my next post, where I provide you with a few additional reasons that I find conventional investment strategies ineffective at best.
I’d love to hear from you! What have been your investment strategies to date, and how have they worked for you? Thank you for sharing.
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