Would you rather have a 401(k) $100,000 balance or a $198,000?

Balanced InvestmentWeighted investment

Assuming that this is not a trick question, hopefully you answered the latter. Recently, I did an analysis of a Chicago law firm with about a $50 million total balance. Had they been in a portfolio based on principles of modern finance and included in the Employee Retirement Income Security Act’s development an employee with a balance of $100,000 in 2001 would have had a balance of $198,000 at the end of 2011! This balance is based on a 60% equity (stock) and 40% bond portfolio*. Had they been invested in the S & P 500 they would have had over $117,000.

Investments or investment management?

Likely you are in disbelief. These modern principles were crystallized at the University of Chicago Booth School Of Business. There is a philosophy based upon much research that shows a path to that result. Likely you have not heard of the names Markowitz, Fama, French and Thaler. However thanks to Google you can quickly find out who they are and which one of them won a Nobel Prize. You may also discover that there is a Center for Research in Security Prices at the University of Chicago.

These results came from investing in a strategic portfolio of 60% stocks and 40% bonds (other portfolios are available). This portfolio uses a disciplined, portfolio strategy. From 2001 to 2011 this portfolio had an annualized return of 6.4%. Lest you think that that was chance, from 1973 to 2011, 11.1% from 1991 to 2001, 9%. This isn’t the only portfolio choice using this methodology. It’s just one that I believe that can fit with many people’s tolerance for the ups and downs of the market and expect to return.

Same access to investments yet different results?

Most news on investing involves focusing on the ingredients and not the recipe. I’m a big fan of of the food show “Chopped”. In that show chefs from various backgrounds are given a few ingredients that they must use along with an access to an extensive pantry. There given some of the finest cooking aids and given 20 to 30 minutes to make their dish. It Is amazing that given the access to the same stuff (information) they come up with wildly different platters. At the end only one is judged to have been the best.

I’ve had many people assume that all advisors, brokers, financial planners, etc. would not come up with wildly different results. This assumes that we all had the same knowledge base and access to the same ingredients, in this case investments. Are you aware that most advisors are working for firms that constrain the investments that they can use or sell to you? I once had someone tell me their proprietary investments would be okay as long as they are good ones. That person also spent thousands of dollars to get an independent opinion to find out if indeed the portfolio that they had been sold was a good one.

As a fiduciary in a retirement plan, it would be a breach of your duty of loyalty to your employees to know a strategy that could have doubled their balance and not to have considered it.

*The hypothetical results shown were based on using a starting balance of $100,000 with no additional contributions. The returns used were the annual returns. This not intended to provide specific advice or recommendations for any individual or plan sponsor. The data used comes from the Balanced Index Strategy Gross Returns Matrix as published by Symmetry Partners.

(1) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. (2) Securities offered through LPL Financial. Member FINRA/SIPC. (3) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IN, IL, MI


About Envision Wealth Planning

I empower smart people to make smarter money choices that honor their personal values. After working together to develop a holistic plan, I help clients navigate the emotions and self-expression that can derail financial wellness. I use Financial Life Planning as a tool to propel client’s values, goals, and passions forward. I help clients figure out strategies to fund and maintain a sustainable retirement, plan for funding college, manage student loan debt, balance current lifestyle with savings goals, assist with financial planning during a divorce, and align values with your investments. I have an MBA from MIT Sloan. My financial designations include Certified Financial Planner (CFP®), Chartered Retirement Planning Counselor (CRPC®), Certified Divorce Financial Analyst® and College Funding and Student Loan Advisor.
This entry was posted in 401k Monitoring, 401k Review, Investment management, Investment Monitoring, Investment selection, Investments, Uncategorized. Bookmark the permalink.

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