The Reason 401k Would Be The Riskiest Investment Of All

By Author: Takeshi yashima
Total Articles: 6
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Even with what happened in 2000 as well as 2007, a lot of people seem to be using the typical investment means, such as 401K as his or her key investment method (I was completely shocked to learn how many expert to be people right from investment / money forums even now believe 401K is actually way to obtain good wealth). For me personally, I'm not putting in dime in 401K (I previously used to however, not anymore...) given that there's almost no benefits for making use of these as good investment. Worse, a majority of these investments really are worst and riskiest investments of all. For this blog, I am going to talk about my own thought of the main reason why investment like 401K would be the worst type of investment and ought to never ever add anything in it.

Reason 1: Recent economic future

As we take a look around the world, eurozone is verge of default and also other developed countries also following a identical direction. At this time there will probably be another Lehman moment in this year just like 2008. Stock market crash that brought on by euro sovereign debt crisis will destroy most of people's life ...
... saving and also investment. That is definitely inevitable. Mass-produced financial consultant might tell typical people that you need to diversified the portfolio so that you can reduce the risk. Interestingly, This is not truly diversification in any way. True diversification would be to diversify across all of the asset classes including stock, real estate, commodities and business. So what many people are doing is actually to buy each of the fund aimlessly just as if we are betting all the horses at horse racing with no taking into consideration which one will win. Though persons perfectly diversified their 401K portfolio, stock is nevertheless stock and all these mutual funds including 401K cannot stop from these systemic stock market crash simply because each of the stocks will certainly crash just like a stone once it occurs.

Reason 2: Paying highest possible tax (In case of traditional 401K)

I am not speaking about mutual fund here however purely speaking about typical 401K. "Deferring the tax to make sure that fund is going to accumulate more quickly due to power of conpound interest!". That is mass-produced financial advisors would advice to individuals who are lack of financial education. interestingly, the things they will not say to those people is this : individuals putting money in 401K have to pay highest tax possible in the end. Also, with this state of economy, what do you think tax will go? It will surely rise down the road (Highest possible tax in US was 97%. Just for your information). Those that keep putting money in 401K will be very unhappy just how much uncle sam will take their money in the end.

Reason 3: Very illiquid

Yet another typical sales talk from financial advisor is "Your current employer can match your contribution so that you may want to invest more". In essense, it is true. interestingly, once we invest in 401K, we can not withdraw your fund till 59 and half years old except in cases where quitting the employment or serious emergency circumustances. It is without a doubt major minus. According to the John Williams from Shadowstats.com, latest inflation rate is 12% (Absolutely not government number, uncle sam always manipulate the actual number with fake scheme). Traditionally, mutual fund is paying close to 8%. In other words, we will be certain to lose 4% every year typically. But, can not move the money around until the specific age. We can not even make use of these fund from 401K regardless if excellent investment opportunities come to our way.

Reason 4: Fee and expense

Fee and expense for many of the 401K and mutual fund are exceedingly costly. Typical expense ratio of these funds are somewhere around 1 - 3%. Therefore, it appears like very low expense. But, it's further from the reality. The more funds and more time we hold, the more it'll cost us. Expense can certainly build up as much as 70% of total fund value as we keep something like 40 to 45 years. Quite a few regular financial planners another sales ways might be "Use your compound interest for your advantage". Yet what they really don't show you is that there will be compound expense. The more funds you have and longer you keep, the more cash will be removed as an expense.

My largest concern on this isn't really fund expense itself but opportunity cost associated with investing in 401K. Suppose that we're not investing in 401K instead putting the money into some other investment programs that will provide much higher rate of returns, simply how much all of us lose as a result of investing in 401K or some other conventional investment? That can be extremely substantial depending on capability of investors.

Reason 5: Simply no control

With 401K, there is not any power over the fund itself. Only thing we are able to do would be to move from one fund to another. In deals such as real estate, we are able to actually discuss with the property manager or other vendors to improve or switch the position relatively quickly however it is impossible for people to say to fund manager what to do. Even worse, let's say fund manager themself doesn't have much understanding of this current economy? In my viewpoint, many people invest in investment vehicles that virtually no control or very little power over. Have you ever before thought the reason why banking institutions lend bucks to invest in real estate investment and never ever lend money to put money into mutual fund or 401K? That is because of hardly any control over. This is way too dangerous for the banking institutions to lend the cash for the project that's absolutely no power over.

Reason 6: Zero protection at all

Investments such as business and real estates can certainly be insured by insurance that actually insures the loss when a thing goes bad. But, there's no insurance for 401K. If we all go to the insurance company to tell broker whether there is policy for 401K or mutual fund, they are going to laugh at us and certainly tell us "NO". Anytime we lose everything in 401K or mutual fund, we're going to lose everything we ever have and mutual fund or 401K businesses will have all the money. To me, this is very risky.

All of these Six factors confirm me that putting money into 401K may be the riskiest thing persons can possibly do. This is absolute insanity to invest in investment vehicle that

1. Pay maximum tax - actually lose only benefit of the stock investment: capital gain

2. Incredibly illiquid - just can't take out funds till far into the future

3. Extremely high expense (accumulated expense)

4. Absolutely no control over

5. Zero protection

6. 100% exposure to the systemic risk

But, most people are assuming it is the path to prosperity. I really feel just sad to find individuals without financial education. In this coming time, I'm concerned that millions will suffer their own life saving resulting from what's imminent. I do sincerely hope more and more people will get financial education. so they can invest his or her funds far more wisely than just putting the money in riskiest investment of all. In last thoughts, Let me say it one more time with Warren Buffett's quotation "Wide diversification is only required when investors DO NOT UNDERSTAND what they are doing".