For four decades, patient savers able to grit their teeth through bubbles, crashes and geopolitical upheaval won the money game. But the formula of building a nest egg by rebalancing a standard mix of stocks and bonds isn’t going to work nearly as well as it has.
First of all, I’m ignoring the incorrect assumption of the title that a 401k ever made anyone rich. At best it taught some people not to immediately spend all their money and to instead save some for the future.
The article’s trying to draw a correlation between present times and the 1960-1980 period when inflation was historically high. It assumes that because a 60 40 stock bond split did poorly in that time the same will apply to the immediate future.
To that point, bonds are designed to not perform as well as stocks as they are lower risk investments. Use them only if you are more worried about losing the money(in short term downturns) you’ve already built up than continuing to make your money compound continually and grow.
The reason for bonds in a portfolio is to hedge against the volatility of the stock market. You don’t need them if you aren’t gonna take out the money for 10+ years. Think of them as an insurance policy against the ups and downs of the market. They can help in the short term but in the long term, they are just a waste of money.
The ‘right’ way to invest for growth is to simply invest in a passively managed Fund or ETF with a low expense ratio (~0.05%) that tries to track the SP500 and simply keep holding it in the market. Time in market beats timing the market. Mr. Money Mustache advocates for essentially this approach as well as bogleheads with their investing principles.
Most employer offered 401ks are crap that limits peoples choices to a few ‘select’ offerings and does not include any good mutual funds or ETFs that meet the above criteria. Instead, they have much higher expense ratios that continually drain money from their accounts and rarely even match an SP500 based fund on performance even excluding fees.
The only use for 401ks is to take advantage of any matching policies they have in place. But it’s better to periodically rollover that 401k balance to an self-managed with vanguard IRA or Roth IRA. Any money you want to save in excess of the matching policies should instead be contributed to your IRA or Roth IRA.
I agree with most of what you’re getting at, but want to make a few clarifications where I think you’ve used loose language.
You missed one glaring benefit of bonds, though you hinted at it.
One of the main benefits of bonds is that they’re largely uncorrelated to stocks, and often negatively correlated (i.e. bonds often go up when stocks go down). So if you’re regularly rebalancing between stocks and bonds, the net impact should be a reduction in volatility (risk) over a long period.
Historically this strategy has underperformed 100% stocks over most periods, but that reduced volatility can also be a psychological benefit and reduce panic selling in a downturn. And apparently a lot of people choose to sell during downturns, so the general advice to include bonds in your portfolio is still likely good.
However, a 60/40 split is too conservative for most investors. I think most people will see some benefit in lower risk with 10% bonds, which also doesn’t cause much of a drag on investments. That said, I’m 100% stocks for now, and I intend to keep it that way until I’m closer to retirement, but I’ll always advise others to put some bonds in their portfolio.
This language is way too strong for me. The (over simplified) priority should be:
The 401k offers incredible tax benefits, but so does the IRA, and the IRA gives the investor more control. However, I will always recommend investing in a 401k beyond the match, but I’ll recommend an IRA to take priority.
Just go down the list with the money you can afford to invest. Don’t avoid investing in a 401k, but don’t prioritize it until you exhaust other tax advantaged options.
All good points. This is just my dumbed down for a more broad approach.