Purveyors of conventional financial “wisdom” tell 401(k) investors not to worry about stock market ups and downs. But Warren Buffet, CEO of Berkshire Hathaway and one of the most successful investors of all time, said in a recent letter to shareholders that market losses of 50 percent or more are not only possible but also inevitable in the future. Financial security expert Pamela Yellen, a two-time New York Times best-selling author, explains why the average investor annual return is lagging inflation.
The typical investor in equity mutual funds has gotten only a 3.88 percent annual return over the last 20 years, Pamela notes, citing the Quantitative Analysis of Investor Behavior by DALBAR, the nation’s leading independent, unbiased investment performance rating firm.
Tiger Legatus Master Fund was up 0.1% net for the second quarter, compared to the MSCI World Index's 7.9% return and the S&P 500's 8.5% gain. For the first half of the year, Tiger Legatus is up 9%, while the MSCI World Index has gained 13.3%, and the S&P has returned 15.3%. Q2 2021 hedge Read More
“As bad as that sounds, the truth is even worse when you consider these are ‘nominal returns,’” Pamela says.
Nominal return is the rate of return on an investment without adjusting for inflation. Inflation for the past 20 years averaged 2.17 percent a year, meaning the real average annual return for these investors is a paltry 1.71 percent. And though the study accounts for fees and expenses investors pay, it does not account for future taxes due on 401(k), IRA and other tax-deferred accounts. Those can devour 25 to 33 percent of savings, according to the Center for Retirement Research at Boston College. Other investors fared even worse.
“Unfortunately, most investors don’t have a clue what return they’ve really gotten in their retirement accounts over time. People consistently overestimate their returns by a large margin, Pamela says. “This is a big reason why the typical household nearing retirement has an average of only $135,000 in their combined retirement accounts, which will provide only a $600 per month income, an analysis by the Federal Reserve Survey of Consumer Finances shows.”
“The survey shows most households have little or nothing outside of the money in their retirement and investment accounts, and that puts their entire life’s savings at risk in a market crash,” she explains.
To avoid this outcome, Pamela advises people to save their money in secure and liquid assets that are not subject to market volatility, such as the savings strategy known as Bank On Yourself. It allows people to know the guaranteed minimum value of their savings at any point in time.
“Real financial security for retirement means knowing exactly how much money you will have when you retire and every step along the way,” she says. “It’s the key to building a nest egg that will allow you to live out your years the way you want to.”