It has been a pretty good ride, hasn’t it?
I mean, since the dark days of the “great recession” when the DOW bottomed out at 6443.27 on March 6, 2009, the market has gone pretty much straight up.
Remember those guys in the office that spent all day with a browser window open to their E-Trade accounts so they could “trade” their mutual funds?
They were all over the place before the DOW tanked. They got killed during the crash. And now that they’ve built their 401ks back up a little, they’re back with a vengeance and they’ve all been partying.
Which is all cool. I don’t ever begrudge anyone their success.
But the funny thing I’m noticing is that people have really short memories. One of those trader-guys even told me that the same thing can’t happen again “because the government won’t let it”.
The other thing I’ve noticed recently is that those guys are a bit less euphoric. The reason is pretty easy to determine.
The DOW closed at 16,576 on December 31, 2013. Last Friday it closed at 16,544.
So those clowns day trading their index funds are now negative for the year.
The crazy thing is, they’re all hyper-emotional about every blip in the market. I get it that they have their entire retirement account in the market, but getting emotional about stuff you can’t control, like the stock market, is just silly.
Yet it continues.
I bring all this up because I’ll be changing jobs shortly. And one of the benes is a 401k match up to 5%.
Now I haven’t made a contribution to any retirement account since 9/11. I’ve been plowing all of my investment capital into rental real estate instead.
So I’ve been out of the 401k game for quite a while. I got to thinking about this “free money” thing though, and wondered if it would be worth it.
I didn’t have a clue how to start the math, so I asked a buddy of mine about it.
He’s Jeff Brown at Bawldguy.com.
We have a thread going on Facebook, but he put it pretty definitively in terms of tax savings in one of his posts:
”What IF somebody ends up with $2 million in their employer sponsored 401k? They won’t, of course. If they did, AND they went from 4% to 7% return (again, they won’t) that’s $140k a year, all of which is taxable. Assuming they had 30 years at say, $15k/yr contribution, and they garnered as much as $3,500/yr in tax savings, that’s a whopping (sarc) $105k in tax savings over 3 decades. On the other hand, our CA resident will find themselves living in CA with $140k taxable. Being conservative, CA/Fed taxes will easily hit $40k/yr. So, in just 4 short years of retirement, this couple will have paid roughly $35k more in income taxes than they ‘saved’ in 3 decades. Who does that to themselves on purpose?”
Um, game, set and match, right?
But to really ice it, my CPA, Brian Borawski then added:
“The taxes on the back end can be brutal. It’s even worse for the person collecting social security because their distributions push those into being taxable so its kind of a double whammy.”
So as Jeff wrote, “Who does that to themselves on purpose?”
Not me. I like opting out of pain. Especially financial pain.
The other interesting thing that happened is that one of my private investors called me several weeks ago. He funded two of my rental houses for five years, and he renewed each for an additional year.
So when he called me I thought he was going to call both notes, since they’re up in December.
But I was blown away by what he wanted. He didn’t want to call them. Far from it.
He wanted to extend each of them for an additional ten years, with an option for another ten after that.
And he also wanted to fund two more rentals.
He told me that he was very happy with the way it has worked out for the last six years. And that there was nothing else out there that paid him a rate of return anywhere close to what I’m paying him (which is 7%).
Now normally that wouldn’t be a big deal, right? I mean, there are plenty of private investors out there who are funding long-term buy and hold properties.
The kicker with this guy though?
He rich and the company he owns manages several billion dollars for other “high net worth” individuals.
Here’s a guy who pays tens of thousands of dollars per year for research. He has a couple of PhDs working for him to do analysis. He has access to institutional people and tools that you and I will never see.
And yet he invests a portion of his own money with me. In my 1100 square foot, 3 bedroom brick bungalows in the best school district in the state.
I’m STILL shaking my head.
Now I have no clue what the stock market is going to do. And to be honest I really don’t care since I’m not in it.
But if you’re chasing returns there, and you’re betting your retirement savings to do it, you have a much higher risk tolerance than I do.
So what’s in your wallet? What’s in your portfolio?
If it’s just paper, then maybe it’s time to invest in hard assets. Like maybe a house you can drive by and always know it’s there.
And instead of having a browser window open to an E-Trade account, you can have it open to Google Street View – and “watch” your boring investment that throws off a fixed interest payment every single month.
If rich guys are doing it, maybe it’s something to consider.