WARNING: Your 401(k) Is About to Implode
I hate to break it to you…
But if you’re a mainstream investor saving for your retirement, the next 10 years could spell serious trouble for you.
That’s the conclusion of an exhaustive study from investment advisory firm Research Affiliates.
They found that the chances of you meeting a standard 6-7% long-term investment return target over the next decade are extremely slim.
In fact, you should prepare for far lower returns than you ever imagined…
A Massive Retirement Shortfall
The Research Affiliates study modeled risk and return forecasts for several mainstream investment portfolios and found a shocking result…
The probability of investors earning even a measly 5% annualized real return over the next decade are remote at best.
How bad is it?
A classic 60/40 portfolio of stocks and bonds has just a 0.2% chance of hitting the 5% target.
A more diversified typical public pension plan has only a 7% chance of achieving a 5% real return over the next decade.
And defined contribution retirement plans, the majority of which are 401(k)s, have only a 6% chance of achieving 5% returns.
What’s worse is these results didn’t factor in management fees or trading costs. So the actual returns are even worse.
Those are scary stats. But what’s the practical effect on those saving for retirement?
Here’s John West, co-author of the study:
“If the retirement calculators say we’ll make 6 percent or 7 percent, and people saved based on that but only make 3 percent, they’re going to have a massive shortfall. They’ll have to work longer or retire with a substantially different standard of living than they thought they would have.”
Are you prepared for that?
It’s Time to Act
Look, there’s no guarantee that this study is going to prove correct. Nobody can predict the future with certainty.
But there’s a powerful factor working in its favor. It’s called “reversion to the mean.”
Historically, prices and returns eventually move back to their mean, or average. So periods of particularly good market returns tend to be followed by particularly bad returns. The reverse is also true.
Look at this way…
Since 2009, the S&P 500 has jumped 212%.
That’s roughly an average annual return of 16%, a lot higher than the historical average.
It’s likely we won’t see that kind of performance in the coming decade.
Sadly, most investors are overlooking this reality. They’re either willfully blind to it and hoping for this historic market run up to continue forever, with zero chance of it ever going down…
Or they believe they can close the performance gap by taking on more risk. But that exposes them to large drawdowns they may never recover from.
Either way, most investors saving for retirement aren’t prepared for what’s coming.
That’s why it’s more important than ever to adopt an investment philosophy like trend following, one that allows you to outperform conventional stock market returns while understanding your risk at all times.
As the data shows, you may not be able to retire without choosing the right kind of strategy. And you’re not going to find it with your broker, advisor or mutual fund manager.
The choice is yours. Your financial future is in your own hands.
Please send your comments to me at coveluncensored@agorafinancial.com. Let me know what you think of today’s issue.
Regards,
Michael Covel
for The Daily Reckoning
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