Your Financial Future / Is it Time to Review Your Retirement Plan Investments?

Studies have shown that many people would rather go to the dentist than plan for their retirement. Wow, it amazes me that folks would rather sit in a chair and possibly endure physical discomfort than review their plan statements as well as their investment and contribution options.

Americans also spend more time planning their annual vacation than their future in retirement. Now why would that be? After spending decades as a financial advisor and counseling several thousand 401(K) plan participants, I recognize that many people just don’t feel knowledgeable about investing. Most indicate that they do not follow the markets closely. When they are given a list of investment options they don’t know a government bond fund from a high yield bond fund or a growth fund from a developing market fund. That’s costing them money, and likely a lot of it! Or they are sitting with a lot of money in a cash account.

Well, let’s dispense with the mystery and look at the three main categories of investment options in a plan. The first is a cash equivalent fund, say a money market or a stable fund. The goal of both is to provide stability in interest bearing accounts. Yes, most people can relate easily to these accounts. While they provide a return of capital, they don’t provide a return on capital. That is, the ability of the funds to ultimately grow to meet or exceed the cost of goods and services in the future.

Bonds are a loan to a government or a company, so a lender you shall be. There are many types from loans to a federal government, an agency of the government or to a corporation. These “loans” earn interest for a period of time; then the principal investment is returned to the investor. Shorter term bonds have lower interest rates than longer term bonds. Governments bonds are typically considered more conservative than corporate bonds so they usually provide a lower interest rate. And bonds issued to a “mature” country like the US government are considered a lower risk than those of a “developing” country like one of the so-called BRIC’s…Brazil, Russia, India and China. So when you invest in a bond you need to consider the ability of the entity to pay interest for the duration of the loan as well as their ability to pay back the principal. Bond funds which own hundreds or even thousands of bonds provide diversification and lower volatility than individual bonds.

Next up, stocks, also called equities. Stocks provide ownership through the purchase of shares in a corporation. They are diverse in size and origin. You may own shares in large, medium or small size companies; domestic or foreign entities. And they represent all industries.

As a shareholder of a corporation, you participate in the gains and losses of a company which is reflected in the share price. You may even receive a form of income in the form of a dividend. You may acquire shares individually or own them through a diversified account which holds shares of many companies like a mutual or exchange traded fund.

Take a look at the following average returns provided by the New York University Stern School of Business *:

Period                      Stock Returns          Bond Returns          Treasury Bill Returns

1928-2014              11.53%                    5.28%                      3.53%

  • 23% 7.11% 5.04%

2005-2014               9.37%                      5.31%                      1.44%

*Periods indicate the arithmetic average: stock returns are of the S& P 500 Index; bonds are 10 year US Treasury bonds and US Treasury Bills are of 3 month maturities (similar to cash equivalents).

The table shows you that the conservative, Treasury bill investor underperformed those who invested in stocks and bonds. While bonds outperformed stocks for 17 out of the 86 years, stocks outperform both investment categories over the long-term.

So looking at these returns, you would think it is a slam dunk that most folks would invest a significant portion of the assets in their IRAs, 401(k) plans and the like in stocks. For most, this is a long term investment decision.

Surprisingly, a recent Bankrate Money Pulse survey shows that 52% of Americans do not own any stocks or stock-based investments like mutual funds! 21% of these individuals cited a lack of investing knowledge as the reason. We’re going to work on that in future issues.

As a last note, $100 invested in the S & P 500 index in 1928 would be worth $289,995 today. The same amount invested in Treasury bonds would be worth $6,972 or in Treasury bills, $1,974. Where do you think your retirement funds should be invested?

Roxanne E. Fleszar, CFP, ChFC is President of Financial Resources Management Corporation, a registered investment advisory firm with offices in Key West, Boston and Naples.

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