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How Your 401k And IRA Rob You

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“Don’t worry about a thing;” said my doctor, “I have an excellent risk management program for your health.”

“Great, that sounds great,” I said, “I like avoiding risk. What are the risks you see in the management of my health?”

“Well, you know, the functioning of the human body is a mystery, it is random. So the most important thing is to medicate you for different possible diseases and go around changing the medication as I see you evolve.”

I tried to argue that I was healthy, and I was there for a checkup, but to no avail. He was convinced that, although I was healthy that day, there was no way of knowing whether I would be healthy 10 minutes after I left the doctor’s office. Of course, I left the office to never come back. I would expect a doctor to know the workings of the human body, unless he is a mediaeval doctor, that is.Although that is a fictional patient-doctor conversation, it is unfortunately one that you may easily have with most fund managers. The art and science of investing in the markets is now at the same level as medicine and chemistry were in the XIV Century.

Why is this?

The short answer is because they can. You see, with 401k, IRAs and the other mechanisms that Wall Street pushed to create in order to have a never-ending flow of free money, the future of most Americans is held hostage by a reduced group of people who pretend to have knowledge about the markets, at the same time as they admit they know nothing about them.

Of course, being Wall Street and being in the business of convincing you of willingly give them interest free money without any promise of return, they elevated ignorance to an art form. If you think of it, when you hire a professional money manager you are paying for a service that either you cannot, or are not willing to perform. We seldom stop to ponder why these purported market wizards have not yet made a killing on Wall Street and are still working on a monthly salary and meager commissions and profits which depend mostly on our own gullibility.

Here we face two problems, which are seemingly complex but arise from the same simple set of rules. Let’s assume that we cannot perform the service of managing our own money. The main reasons would be that the markets are unpredictable, that managing money requires some special knowledge, that we don’t have the time to do it, that we don’t care that much about money and, after all, there are other things in life, that “my father” never ever paid any attention to the markets and yet he has a nice retirement. There may be others, and they are equally irrelevant. Let’s break the arguments apart to see if can falsify them.

  1. If the markets are unpredictable neither you nor anybody else can do anything about it, so you will be better off doing it yourself.The proponents of the random walk, or the chaos theory applied to the markets, would tell you that over long periods of time the US markets provided an average return of around 10% a year. Furthermore, they will tell you that there is no difference between the stock selections of professional money managers and random selection over the long run. Essentially, what they are telling you is that the work any money manager who adheres to the random walk theory is virtually irrelevant, because you can achieve the same results by random chance.The corollary is that you do not need a money manager, you can do it yourself, and all you need is some luck and patience. Actually, you may want to replace the luck with knowledge, but if you are patient, you will acquire the knowledge and see the results eventually.If the markets are unpredictable, investing does not require special knowledge. If the markets are predictable, you will have time to acquire the knowledge. Either way, the key is patience, and if you check out with any money manager, they will tell you that they will grow your money over the years. Well, over the years you can grow your money and your knowledge and reinvest the management fees. In any event, the random walk theory tells us that over the long run you will anyway make around 10% a year. By the by, you should not invest in any fund that has a net return of less than 10% a year average over a long time because, whatever they are doing, they are doing it worse than a monkey.
  2. Long term investing does not require a lot of time. If you balance your checkbook, you can invest long term in the markets. Acquiring the knowledge to invest with confidence takes time, but anyone (and I mean anyone) can do it. All you need is a mentor and some common sense to find one. There are many investment clubs on the Web where people help each other. What is most probably the case is that you have the time to learn this important survival skill, but you are putting it off because you do not even know where to start. Still, the task is not as daunting as may seem: the unfathomable wisdom of any broker can be found on the shelves of your local bookstore.
  3. Yes, other things in life are more important than money. If you ask me, most everything else in life is more important than money. However, we need money to buy time to enjoy those important things. If you are working two jobs, or one that feels like three and you do not have an exit strategy, you will be running on the hamster wheel until you drop dead, and you will not enjoy the most important things in life.And listen me well on this one. It does not matter if you are making a lot or too little. The only thing that matters is to have the wealth to enjoy leisure. It may not happen this year, it may not happen in ten years, but you need to create a plan to be independent and have leisure before it is too late. For that, you need to figure out how to manage your money yourself and how to better invest in your future. I am not talking about becoming an overnight millionaire; I am talking about setting clear goals and plans for achieving them. I am talking about working because you want to, not because you have to.

A Little Bit of History

Finally, you need to understand that, in 1978, Americans were robbed of one of their acquired rights. 401k plans (no matter how you slice them) have only two goals, make retirement plans cheaper for employers, and provide a steady flow of free money to Wall Street.

I should write a longer history of the 401k, but please bear with me on this short introduction. In the beginning, there was not such a thing as a retirement plan. People worked all their lives until they dropped dead and that was the it of it. During the period of rapid industrialization of the US, workers fought the super exploitation conditions they were forced to work under, and acquired certain rights, like the 40-hour workweek, pension plans, health plans, and other rights that we now take for granted, but that at the end of the XIX century and beginning of the XX century where mainly pushed forward by socialists and communists (and where fought against as an attack on the very foundations of American wealth).

By the time Roosevelt took the measures of the New Deal, the American laizzes fair economy had failed horribly. You had shantytowns in Central Park, and the inhabitants were not docile either, with frequent riots demanding a change in politics. To the pressure from the left, you had to add the political pressure from the right (supported by large capital groups like Ford’s, Rockefeller’s, etc.), with a Nazi party in America that was able to (and did) fill up Madison Square Garden. It was the double threat of falling into fascism or socialism that moved Roosevelt to create the social security system. But beware, this was not a gift from the government, it was a last resort measure to keep the status quo. So we got social security and pension plans. The social security retirement age, for good measure, was set up at around the average life expectancy of the time, and it has been moving up as life expectancy rose. The message is clear, work till you drop.

Read the continuation of this article The Rags To Riches Trap

This article is part of the series "Redefining Riches"

  1. How Your 401k And IRA Rob You
  2. The Rags To Riches Trap
  3. You Are Not Going to Be Rich
  4. It’s the History, Stupid
  5. Ghosts and Demons

Franklin @ December 8, 2007

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