What I’ve Learned From The Last Two Years of Investing

It has been a rough few years for anyone saving for retirement and investing in the stock market. The average 401k balance lost 35-38% last year (2009). I feel especially bad for those who are in their late-fifties and early sixties, folks who were counting on their savings to get them through retirement. Now they have to work longer or figure out a way to spend dramatically less. Not a good spot to be in. Here are two important things I have seen learned over the last two years:

1. Over the last 24-36 months, asset allocation didn’t work. I had my investments spread among at least five different categories, including commodities, fixed income and your standard assortment of domestic and international equity funds. Well, diversification didn’t do diddly for this dude. I lost 35%, just like everyone else. Small cap funds lost more, fixed income funds lost less. The only thing that stayed the same was the chunk of money sitting in cash. Really makes me wonder how I will survive the markets when I’m older. “Experts” tell us you need to remain invested in equities even through retirement if you are going to keep up with inflation. There has to be a better way.

2. Despite my losses, my money managers still made money: I estimate that I paid between $4,500 and $5,200 each year to the money managers, even after beginning my shift over to lower-cost ETFs and index funds. That’s almost $10,000 for the privilege of losing tens of thousands of dollars. And my losses don’t include taxes on income, dividends, and capital gains.

In an earlier draft of this post I made a typo and said “money mangers,” which is perfect, because in French “manger” means “to eat,” and that’s exactly what these firms are doing to my retirement account.