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The Great IRA/401K Hoax

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Published: 15Mar2012
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Many people believe their IRA actually helps them create wealth.

People may think this because of the relentless marketing by big Wall Street firms. It could have been the relentless cheerleading by CNBC. It could have been their only choice from their employer.

But it doesn't matter. All that matters is most people have horrible results with their IRA - absolutely horrible. People have lost tremendous amounts of money due to investing in their IRA.

Since the year 1998, stock market returns would disappoint even the lowest expectations. These returns are even worse once you take into account inflation - I'd say they are embarrassing! I choose the total stock market return for the last 14 years - since January 1998. The great thing about this website is you can account for inflation too. Adjusted the returns for inflation, you're making 1.2% in the stock market! Those are horrible returns.

But here is the kicker - most people pay fees in their IRA and mutual funds. These fees are very high. Most people pay about 4% per year in fees for the IRA and mutual funds they hold in their IRA.

It's horrible news. Subtract 4% from the measly 1.2% returns of the last 14 years, and you're losing money. You'd have been better putting the money in a mattress, and using some of it to light fireworks on the 4th of July. At least you would have had a bit of fun once a year, and known it was safe the rest of the time.

Here are the sad facts. About 50% of the people in the United States work for small businesses, according to the Census bureau. And small businesses pay dramatically higher fees for their IRA's and mutual funds. I gave a number of 4% fees - and this was being generous. Some many people pay fees as high as 4.8%. Small companies, because they lack negotiating power due to the few employees they have on staff, often have to rely on costly plan providers, such as insurance companies.

Social Security is Better Investment than the Stock Market over the last 14 Years

It's almost impossible to believe, but you'd do better putting your money into a government program.

You've heard how Social Security is a bad investment? Well, it is. It's a terrible investment. You're only likely to make 2% on your money in social security.

But it turns out Social Security is actually a great investment compared to your most people's IRA. Those 2% returns on Social Security are after inflation and after fees.

For most people, Social Security is a better investment in the stock market once you take into account inflation! Ouch.

This doesn't look good for the IRA. Social security has outperformed the stock market by about 5% per year over the last 14 years.

I've made the case we're in store for another 5-10 years of bad stock market returns. Sometimes, bear markets last for decades. The one after the great depression did.

So don't expect some miracle rally to make it all better. It's probably not happening in the next 5 years.

This is disturbing, depressing news for many people. However, it's entirely possible to do better - to do much, much better.

How to Beat the Market in Your IRA

You can get better returns in your IRA by taking advantage of a Trend Following strategy and applying it within your IRA.

With a small amount of work and some basic trend trading principles, you can make more money in your IRA. Not only that, you can make more money with lower risk, and lower fees.

People everywhere are complaining about their retirement accounts and are afraid of having nothing left with which to retire. But the good news is that you can make more money in your IRA (and 401k's too) if you can do a few simple things.

First, you need to make sure your IRA and 401k fees are as low as possible. Fees are wealth killer #1: high fees usually equal poor returns. If you are paying high fees, get out of that IRA program and go somewhere with low fees. You can shop around for this.

It's worth the few hours of time it will take to make the shift. You will make the equivalent of thousands dollars per hour just by shifting to a low fee IRA custodian!

When you do this, make sure you avoid paying the transfer taxes. Also, make sure you can invest in low fee ETF's and have low fee stock transactions. There are several large brokers out there who are excellent low-cost choices. Consult with your advisor on these procedures and be careful to do it correctly.

Then, you need something more than buy and hold stock market. If you use Buy and Hold you get problems like 2008 where you lose 30% in a matter of weeks. Many people panic and pull their money out during these panic times, so they miss out on the recoveries.

But can you protect your wealth within a retirement account? Well, the answer is with a bit of work, and a bit of knowledge, yes.

When you use market-action based rules and keep your fees low, you can dramatically reduce the risk you face, while increasing the returns to your portfolio. A good example is the SPY. The SPY is a popular, low fee S&P 500 index ETF - it's cheap and easy to use in your IRA.

Using the techniques of Trend Following, you would have avoided most of the downward move in 2008, and also caught most of the upward move in 2009.

This strategy can turbocharge the returns in your IRA. Using this moving average rule since 2000 would have nearly doubled your returns in the stock market. That's fantastic!

But even better, the worst loss with this rule would have been about 5%. That's the worst loss, not the smallest. The stock market lost 40% in 2001-2002, then 50% in 2008. Losses of this magnitude are absolutely terrifying.

So keep in mind that you have choices when it comes to your IRA and 401Ks and some of them can make you a lot more money for your retirement.

Michael Sankowski lives in Oak Park, IL and when not playing the guitar, has been a professional trader for 20 years. He's traded billions of dollars on four continents and is a well-known financial writer. He's a CFA, CAIA, and has created patented Futures products. He is the President of Trend Following 101 and GenerateFX, a forex information site.

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