The dollar will eventually be revealed as the biggest financial fraud ever perpetrated against mankind.
That's been my long-standing prediction. In retrospect – once the whole charade is exposed – our children and grandchildren will think we're under some kind of mind-control device, or perhaps the fluoride in the water IS making us dull-witted.
Believing that a piece of paper, backed by no assets is a good store of value? Insane.
But I'm not going to talk about the dollar today.
Today I'm going to talk about one of the runners up in the financial fraud category.
It's a huge swindle that's been perpetrated on American investors and retirees for decades now.
I'm referring to the 401(k) industry.
As someone who works closely with people in the marketing field, the whole thing is actually pretty brilliant.
Here's how it works: the Federal Government creates a tax loophole that lets Americans sock away and invest part of their paycheck, pre-taxes. Then, when they retire and begin to draw on those investments, they pay taxes on the gains.
Okay, so that's not the swindle. The swindle is that Americans have been utterly convinced that all you need to do in order to retire is to shove money into your 401(k) every month.
It's a bastardization of the buy-and-hold strategy popularized in the value-investing field by people like Benjamin Graham.
I think regularly reviewing Mr. Graham's definition of an investment is useful to see how it contrasts with the modern definition of buy and hold as typically seen in most people's 401(k) strategies.
Graham defines an investment as an operation or business that "…upon thorough analysis, promises safety of principle and a satisfactory return."
Before I excoriate the average person who throws money into a 401(k) I should tell you: I have a 401(k) through my employment here at Wyatt Investment Research.
I'm not against 401(k)s – they certainly serve a purpose, and they make a ton of sense for people who get significant matching contributions from their employer.
But it is the blind trust in the 401(k) 'institution' that I have trouble with, and which I want all investors to question – just like they should any investment in any individual stock. My point being, that 401(k) investors should insure through "…thorough analysis…" that they are promised "…safety of principle and a satisfactory return."
That brings me to a comment I received from a reader.
Lenny G writes:
"I appreciated your recent blog on investing or speculating. However after the recent "lost decade" on gains where a person like me had invested his money in Mackenzie mutual funds here in Canada whom invested in popular big names in equities, tech etc, everything from Nestle to TD bank to Oracle to Apple and was charged in excess of 2% M.E.R and after 7-10 years broke even because I was a "buy and hold" investor I say the game has changed forever. Buy and hold strategies don't work like they used to and one must execute more trades (rebalancing) to stay ahead in this unpredictable rigged global market."
Lenny, thanks for writing in. But does everyone see the difference between Lenny's strategy of buy and hold, and Graham's definition of an investment?
Much like the dollar, which once was guaranteed and backed by precious metals, but slowly has come to represent an idea of money – modern buy-and-hold strategies, like the one that Lenny mentioned, have been confused with the classical method of investing.
The 401(k) and mutual fund industries have convinced the average investor that throwing your money into a mutual fund is the same thing as being a value investor.
The regular monthly contributions into 401(k)s and mutual funds DWARF the size of the TARP bailouts. It's a huge gift to financial institutions. And today, most mutual funds have zero interest in outperforming the market. They just want to avoid being left behind – in other words by underperforming their peers. So, most people should probably just buy an index ETF if they want to capture the market's gains. There's no reason to speculate on one mutual fund vs. another if all you want is average market gains.
But again – even the idea of buying an index fund is flawed if – as Lenny points out – you wanted to throw money into the market at almost any time in the last 12 years. Buying and holding is not always a great idea. Sometimes it works. Other times, it's the best way to lose your shirt – or just break even.
In order to be a real investor, you have to do a modicum of research. You have to understand the business or operation you're purchasing. Otherwise, you're simply speculating that the market will rise.
And listen, there's a time and place for speculation. But it certainly shouldn't comprise the large part of your portfolio, and it shouldn't be a substitute for diligent, research based, fundamental investing.
Even as a newsletter editor and analyst, I beg you: do your own independent research to come to your own conclusions. My editorials are but a stepping stone to greater wealth and success, and no single source of information should be a substitute for your own analysis.
Because it's your money! It's your time, and it's your livelihood. If you can't be bothered to go the extra mile, why would you expect a mutual fund manager to?