There is almost no limit to the ability of investors to ignore the lessons of the past. This cost them dearly last year. Here are six of the most important of these lessons for investors:
1) Beware of market forecasts, even by experts. As 2008 began, strategists from Wall Street’s 12 major firms forecast the end-of-the-year closing level and earnings of the Standard and Poor’s 500 Stock Index. On average, the forecast was for a year-end price of 1,640 and earnings of $97. There was remarkably little disparity of opinion among these sages.
Reality: the S&P closed the year at 903, with reported earnings estimated at $50.
Strategists aren’t always wrong. But they have been consistent, betting year after year that the market will rise, usually by about 10%. Thus, they got it about right in 2004, 2006 and 2007, but also totally missed the market declines in 2000, 2001 and 2002, and vastly underestimated the resurgence in 2003.
Ignore the forecasts of inevitably bullish strategists. Bearish strategists on Wall Street’s payroll don’t survive for long.
Read the rest of John Bogle’s column here.
Matt / Google+
A new tax law will allow retirees to skip required withdrawals from individual retirement accounts and related accounts this year. The change — signed into law by President Bush last month — is intended to give beaten-down nest eggs time to rebound from the brutal bear market.
But the new law may also create confusion, particularly for those just starting to take required withdrawals.
“The [existing] rules are confusing enough,” says Ed Slott, an IRA consultant in Rockville Centre, N.Y. “Now, more people than ever are going to get tripped up.”
Read the rest of the article at the Wall Street Journal.
Matt / Google+
Many workers around the country participate in their company’s 401(k) plan.Â While these are great vehicles to save money toward retirement, they are often loaded with high expenses and hidden fees.Â This artice in the Wall Street Journal reviews what kind of information to look at when selecting mutual funds in a 401(k) plan and what to look out for.Â While not necessarily groundbreaking news, the author mentions to be on the lookout for high expense ratios, 12b-1 fees, and short term trading costs.
Here’s an excerpt:
You may not realize it, but you could be paying thousands of dollars a year in fees on your 401(k) retirement account, hidden expenses that affect how your savings will grow. The government is now trying to expose those charges so you can make better investment decisions.
Under regulations proposed by the Department of Labor, 401(k) plans every year will have to disclose each investment’s annual expense ratio — the percentage that goes to management and other costs — along with more detailed performance data. In addition, any administrative or other fees deducted from your account will have to be spelled out. New regulations may go into effect as soon as Jan. 1.
Matt / Google+
I am a 29 year old that recently switched jobs. I was wondering what I should do with my former employer’s 401(k)? Should I roll over into an IRA, and what are the benefits of rolling over?
- William, Pennsylvania
In nearly every circumstance I would recommend rolling over an old 401(k) into an individual retirement account (IRA). The reason being is because you have a lot more control over where you invest your money. Most 401(k)’s limit the number of investment options a plan participant can put their money in. Also, the mutual funds that many 401(k) plans offer are often loaded with high expense ratios and other hidden costs. As an individual investor, you have practically an unlimited amount of options. Unless your former employer’s 401(k) offers you attractive options that are not available to you outside of the plan, I would recommend rolling it over into an IRA at Vanguard (www.vanguard.com) or Fidelity (www.fidelity.com). Vanguard offers low-cost index mutual funds that outperform many of its actively managed peers. Fidelity offers a variety of mutual funds including similar low-cost index fund and it also has a brokerage where an investor can purchase individual stocks. As an added bonus, many mutual fund companies will handle the 401(k) rollover for you at no charge.
Matt / Google+