Transcript:
Easan Arulanantham:
So another question is kind of related to this downturn is my 401k is down substantially? You know, should I be doing anything to manage it or do to fix it?
Tom Vaughan:
Yeah, I’ve actually seen several articles about this, where the 401k A’s are obviously down, you know, the markets down. And people are, you know, trying to manage their 401k is on their own. And, you know, what do they do? And how do they look at it. So number one, in my opinion, would be just the fact that this is something I was trying to remind clients of the one thing about a 401k, or a 403, B, or 457 plan, or all these plans that are kind of attached to employment, you are putting money into those most likely every paycheck, you know, for most plans. And you’re also maybe getting a match your company’s putting money in there. And so when, and if you’re not retired yet, this drop that we’re having, you’re actually buying, you know, more and more shares for the same dollar amount all the way down. And when it finally turns around, that looks pretty good. I mean, you’re at your you’re lowering your average price per share for those holdings that you’re buying, because you’re buying and buying and buying. So 401k is a really powerful for that dollar cost averaging impact. And so just keep that in mind, and maybe kind of at least temporarily celebrate the fact that it’s down because you’re buying more shares with the same dollar amounts, with the thought process that it’s going to come back, you know, at some point in time, and hopefully, you’ve identified the right mixture that isn’t exceeding your risk tolerance and making you really lose sleep because that that’s a problem. So you do need to start off with making sure you’ve got the right amount of risk in your 401k. And then when it drops, you just keep on buying.
Alright, so the next thing I take a look at is really the thought process of professional management. I know this is self serving, because this is what we do. I just read a headline about the average individual investor in this downturn is down 32%. Wow, I mean, the S&P 500 was down 20, from high to low. And so the average individual investor is doing worse. And there’s lots of reasons for that, mostly, that people just go running off into things that are working really well. And then they kind of fall in love with them. And then they don’t make adjustments, or they don’t even look sometimes enough. If you don’t pay attention. Sometimes that can be you know, things can decay, you got the wrong things in your portfolio, whatever. So you’re gonna hire a professional like us to manage your 401k. And then, you know, we have that experience of doing this every single day for the last 30 some odd years. And you know, when we’re supposed to be, you know, rebalancing, and when you know what portfolio you should have, you know, when we have a whole process to try to figure out somebody’s risk tolerance, and figure out which portfolio mixture would match that risk tolerance.
And so we would start off, in most cases, working within the list of companies or investments that somebody has inside their 401k, for example, and then we basically make those trades. And, you know, we can’t do anything else on 401k. But we can, we can manage that 401k. You know, we charge a fee. But that’s, you know, theoretically, if things go the right direction, we pay for ourselves, right, because we’re able to maybe manage the money better than the individual. The other thing that’s really, really fascinating right now is that a lot of these 401k K’s have that ability to use what’s called a self directed 401k. And so you would move it out of the traditional 401k list of holdings out into kind of a brokerage account. Because sometimes they call it a brokerage window brokerage link, they have a lot of different names for it. But what it really means is that then you can buy anything, right? Which honestly could be worse for the average investor, because they feel often by, you know, all these things that are getting crushed down 80% from their highs back in 2020, or whatever. But for us, it opens up doors to be able to really do some fantastic things. Because you can do, you know, really, really high quality investments.
You can do a rebalancing inside of that we can buy Vanguard and iShares until we can mix different companies that you don’t often see. I mean, what do we have maybe two 3000 choices between individual stocks and Exchange Traded Funds, for example that we look at, versus a list inside the regular 401k? That might be what 20 3040, right? We can do ESG portfolios, environmental, social governance portfolios in those brokerage windows that you can’t do, you know, in a normal so there’s all kinds of interesting things that you can do there. And so anyway, that that would be one of the things to think about is who’s managing your 401k Are you managing it? How much time do you put in it? How much confidence do you have and I’ve met people that are really good. So I don’t have a problem with that. But I’ve also met a lot of people that aren’t, you know, as good because they just don’t have the time. I mean, they’re busy, they’re working, they have other interests. And their 401k ‘s are getting bigger and bigger, you know, so it’s becoming more of a problem, you know, a 10% downturn on a million dollar 401k is really painful to watch. So, you know, making sure that you got the right piece. And I think it gives you some peace of mind personally. But anyway, that’s, that’s how I would look at the 401k PS. I mean, what do you think?
Easan Arulanantham:
Yeah, especially, I think when you’re starting out, or like a target date is a really good option, because it really helps it’s managed, it kinda adjust for your risk. But when you start to get those larger amounts, you know, are you having the right parachute for your equities, you know, bonds, overall bonds this year, have not done well. But if you’re on short term bonds, you’ve done much better. So having the ability to pick and choose, you know, asset classes within asset classes is important.
Tom Vaughan:
Yeah, it’s a good point. I mean, if you have $5,000 in a 401k, it’s, it’s not the same as having 5 million, right? I mean, so, you know, and so that smaller dollar amount, you can definitely use something like the target funds. I don’t know that I would do that for the 5 million as much personally. Because, for example, there’s a ton of international exposure right now in those and that’s not doing very well and you know, so there’s some things that I might change, you know, if I had a choice, but that’s good point size of the portfolio and size of 401k or retirement plan does make a difference.