Should You (Or Your Parents) Be In the Stock Market Now?

If you or your parents have a retirement account (or any investment accounts for that matter), now is the time to get connected to how those accounts are invested. While you may have outsourced all of this to a broker in the past, you can no longer afford to allow your investments to be made without your clear understanding of exactly what you are investing in, how, and whether your investments align with your plans for the future.

A colleague shared a story that hit home with us, and it may for you as well.

After our colleague’s grandmother died, her grandmother’s retirement and investment accounts went directly to her mom, due to the estate planning they had set up. No court process. No intervention. No conflict. Great!

But our colleague’s mom then never looked at the investments in those accounts. She just let them stay as they were for four years, until finally, her daughters convinced her to look.

When they did look, they were mortified to find that, even though the investments should have been gaining with the bull market we’ve been in for the last many years, the accounts had actually decreased over the years from $100,000 to $60,000. If my colleague and her mom had looked at these accounts and re-allocated them when grandma died, this would not have been the case.

Fast forward to now, and the daughters think to look at mom’s retirement accounts with her, only to discover that mom has a 401k with $180,000 in it and it’s lost $17,000 over the last two weeks. Mom had picked her investments with the help of a friend many, many years before, and hadn’t looked at those investments since.

Our colleague’s mom is mostly invested in high-growth ETFs, which may have been the right choice when she was building her retirement fund, but definitely is not the right choice given that she retires next year and will need to start making withdrawals to replace her income.

If mom doesn’t get her money into safer investments now, her daughters could end up needing to support her for the rest of her life.

So, why are we sharing this story with you?

Because now is the time for you to get connected to your investments, even if they are in a retirement account and invested through a broker or advisor. This is simply not the time to set it and forget it. It’s time to know what you have, and make intentional, aware choices about how your resources (and your parent’s resources) are being used.

Now is the time to truly understand what you have, and use it wisely.

EDUCATE YOURSELF

If you or your parents have a retirement account, and you are not intimately connected to how your assets are being invested, it’s time to get more involved.

Log in to your retirement account or pull your last statement and look. Many brokerages select investment funds for their clients’ portfolios based on rates of growth. They’ll offer investment options based on a few tiers of growth and risk, and very often you have no idea what your assets are actually invested in.

Labels like “slow-growth” or “conservative” or “high-growth” or “income” aren’t enough to tell you exactly where your money is invested. So what you want to do now is look at your statement, which should contain the names of the funds chosen for you, and you can go from there to do your research. Look up each of the funds on sites like Yahoo Finance to see what you are investing in, and whether you understand these companies, believe in their future growth, and want to stay invested there.

If your investments are actively managed mutual funds, are you willing to keep trusting the fund manager to ensure its long-term growth? If not, now may be the time to make a shift. It’s possible that you have some losses right now, so you’ll have to decide if you want to lock in and limit those losses (and potentially trade some future gains even) to get more connected to what you are investing in now.

Go through this process with your parents, too. The money they have invested in the stock market is part of your overall family wealth. If it’s not there to support them through their senior years, that financial responsibility will eventually fall to you. Having these conversations with them now can be difficult, but it’s important. And if you need help with this, please let us know, and we can support you as you raise these issues with them.

If you have a broker you work with, call them now, and ask to get on a video conference. Then, have them help you review each investment, why it’s been chosen, and whether there may be better or other options for you or your parents.

Here’s the key: make sure you understand it, and don’t hang up the phone until you do. If your broker is using words you don’t understand, or jargon, keep asking questions until you do understand.

ARE YOU, OR IS THE PERSON MANAGING YOUR INVESTMENTS, TRYING TO BEAT THE STOCK MARKET AVERAGE?

Another question to consider is how your investments are being actively managed. Without active management, the average total stock market average has been approximately 10% in annual returns over the last century. In other words, that’s what you would average long-term if you just placed all of your investments in a total stock market index fund. This also means that any stock market investment that is actively managed and averages an yield of less than 10% annually is a result of incompetence.

Approximately forty-two percent of millionaires make less than one transaction per year with their investments. Less than ten percent of U.S. millionaires would call themselves “active” traders. These are people who understand how to take advantage of long-term compounding interest. By contrast, many financial advisors and managers benefit by engaging in multiple transactions, buying and selling their client’s investments. This is because a busy portfolio yields higher commissions for sales and gains, even though it also costs much more in capital gains taxes.

As David Bach writes: “There is a widespread notion that the way you do well as an investor is to buy when the market is low and sell when it is high — what’s known as timing the market. It would be great if there really was a system you could use to make this work. Unfortunately, no one seems to have found it yet.” Indeed, if your stock market investments are being managed by someone who is trying to “time” the market, there you already know the reason why your investments are averaging less than 10% per year.

J.L. Collins explains: “The fact is, few fund managers will beat the index over time. In 2013, Vanguard posted the results of their research on this. Starting in 1998 they looked at all of the 1,540 actively managed equity funds that existed at the time. Over the next 15 years only 55% of these funds survived and only 18% managed to both survive and outperform the index. 82% failed to outperform the unmanaged index. But 100% of them charged their clients high fees to try.”

It might be that a total stock market index fund is one way that you ensure your investments are secure in the long-run. This doesn’t mean that you would be settling for less. It means that you would be locking in the yields the long-term investments can produce. Collins continues: “To buy the index is to accept the market’s ‘average’ return. People have trouble accepting the idea of themselves or anything in their life as average. But in this context ‘average’ is mostly misunderstood. Rather than meaning index fund returns are at the midpoint, the word ‘average’ here means the combined performance of all the stocks in an index. Professional money managers are measured against how well they do against this return. As we’ve seen, in any given year most underperform their target index. Indeed, over periods of 15 to 30 years, the index will outperform 82% to 99% of actively managed funds.”

Perhaps it would be better if your investments were not a part of those actively managed funds.