About 30 years ago we underwent a huge change to our retirement system in this country, shifting from pension plans to individual retirement accounts such as 401Ks and IRAs. It is a change that has led to the development of a system that is stacked against the typical investor. In fact, it’s become nothing less than a rip-off, deeply damaging or destroying the financial futures of most of the 100 million Americans who participate.
At this point you may well be asking yourself what the heck am I talking about? Don’t these retirement accounts allow us to defer all kinds of taxes and provide the opportunity to grow our money tax deferred for a long time to come? Yes, they do, but at what price?
Once your money is in that tax deferred account, pretty much all you can invest in are the products of the Financial Services Industry. The choices are basically limited to publicly traded stocks, bonds and commodities, and derivative products that creatively play off those same assets.
The problem with this is that you are now forced to participate in a rigged system, one that works just great for the Financial Services Industry, as they are guaranteed to make a lot of money regardless of whether you make any money or not. But what about you? Does this system work for you, too?
Massive failure. The truth is that over the last 30 years, the vast majority (over 85%) of all private investors not only made nothing, they’ve lost money. The only ones to reliably and consistently profit from the retirement account system have been the Financial Services Industry, from the big banks and the firms of Wall Street right on down to your friendly local financial advisor. It also includes the government officials and big company management teams who have essentially allowed themselves to be bought off as this retirement system became so dysfunctional that regular investors were left with far too little in the way of viable options or protections.
As a lifetime entrepreneur and business owner I am a big fan of capitalism, but when people and institutions of power cheat the system for their own personal gain we need to know about it. More importantly, we need to know what to do about it or else any system, no matter how great it’s potential, will be a failure.
Here is the evidence of this dramatic failure of our existing retirement system, including information from two groundbreaking studies that you’ve probably never seen as they were buried by the Financial Services Industry and their allies, the Financial Media.
The proof is in the numbers. 1984-2002 were far and away the 19 greatest years in U.S. stock market history. The U.S. Stock Market rose an amazing 793% during that time. The return for the average stock investor, however, was less than 3% a year after adjusting for inflation! This disaster was clearly documented in a study by Dalbar Corporation, one of the largest financial industry research firms in the country.
The stock market growth was amazing yet most people, following standard financial advice of advisors and the financial media, never benefitted. Rolling from one “hot” mutual fund to the next, encouraged and advised to “outsmart” the market, paying so much in commissions, fees and trading costs that they made essentially nothing!
So how about since then? The 21st century is now 13 years old. Here is what has happened during that time. The U.S. Stock Market, as measured by the S&P 500 index, is up a total of 6% over the last 13 years. That’s a gain of less than one half percent per year vs. inflation of 38%, an overall loss of 32%. That’s even before factoring in the industry’s ongoing track record of massive underperformance of the market. The bottom line is that most investors have lost over half their money, inflation adjusted, over the last 13 years.
Where did everyone’s money go? The retirement nest eggs of tens of millions of people? What we see is who pays for the multibillion dollar financial services industry–that’s where everyone’s money went! The other thing this terrible loss shows is an industry that never did learn to invest successfully, just how to very successfully sell the idea that they do.
The depth of incompetence. Many studies have documented that you can invest your money better than the experts and time and again those studies were effectively buried by the Financial Services Industry and the Financial Media. The study, Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry by Daniel Bergstresser of the Harvard Business School was considered so comprehensive it was dubbed “The Study of the Decade”. Teams of people from the Harvard Business School and others around the country came together to study trillions of dollars of transactions over many years. The financial industry supported the study, even provided the data, confident the results would be a great marketing tool to show their clients what a good job they were doing. Well, you never heard about this study, did you? Here’s why:
Study Conclusions:
- As a group, financial advisors in America not only underperformed the market as a whole, they underperformed what most people did on their own without an advisor.
- Individual investor’s returns were over twice those of the experts.
- Advisors do not provide superior asset allocation.
To understand the true depth of the incompetence and greed involved I urge you to read the following ‘industry insider’ letter about this study. It is both highly educational and, to me, nothing short of jaw-dropping.
http://trendfollowing.com/whitepaper/The%20Study%20of%20the%20Decade.pdf
Every day investors entrust their life savings to active managers of various stripes. They use brokers to pick stocks and bonds and time the market or invest directly in funds that have “beaten the markets” in the recent past. Yet they never show you their complete, unedited long term track record or the long term track record of the funds they invested in. They can’t!
Most financial advisors recommend their clients invest in the five star funds, as rated by Morningstar Inc. A recent study that examined the performance of Morningstar’s five-star rated funds between 1999 and 2009. reached the conclusion that, “Of the 248 stock funds with five-star ratings at the start of the period, just four still kept that rank after 10 years. And the 218 domestic stock funds with the rating typically lagged their category averages over the period — not just the benchmarks, but other mutual funds. In other words, it’s not just that five-star funds don’t, on average, continue to lead their peers — they actually do worse.”
And there’s more. Over 80% of all managed funds fail to beat the market each year, and the ones that do, change from year to year. A study of managed fund performance from 1993 to 1998 and again from 1998 to 2003, showed that only 2% of managed mutual funds beat the market for both 5 year periods.
What this means is don’t ever invest in managed mutual funds, which is what the experts are always trying to sell you. Their underperformance, combined with their commissions and other hidden costs, will drain your profits away.
Want more? Here’s great article from last week appropriately entitled Fund Managers: Really, Really Bad at What They Do
So there’s the proof.
Most people have never been told the system is structured to do little more than steal their money. All along they were led to believe that most people made out great and it was just them that missed out. All along they never got to see the truth (the information I’ve just shared with you), because the Financial Services Industry, in collusion with their allies in the Media, saw to it that the truth (a truth that was anything but in the Industry’s best interests) remained hidden.
Now 1 person in 2 turning 65 today can’t retire and it’s only going to get worse. We’re heading toward a world full of 75 year olds doing menial jobs or living near the poverty line. Is it any surprise?
So how do you see to it that you aren’t in that position someday? Well, in next week’s blog I’ll get into exactly what to do about it.