401k Investing for Newbies and Nerds
There are one hundred and thirty million American workers who collectively own $35 trillion in their 401k and related retirement accounts. The owners of these accounts face both challenges and opportunities. The largest opportunity is that their accounts are investment accounts, not savings accounts, and for the past three decades they have grown in the low double-digit range.
The main challenge 401k owners face is that there are required to make their own investment decisions by choosing from a limited menu of mutual funds.
These 130 million self-directed retirement account owners can be divided into 3 distinct categories. The first are those who could care less about their money and are willing to just let nature take its course. The second group, NEWBIES, are inexperienced in the investment process, but are willing to become engaged in the management of their hard earned dollars. The third group, NERDS, are those who have a modicum of investment expertise and are willing to devote the time and energy to expand their investments skills.
The mission of my podcast is to motivate and educate 401k NEWBIES and NERDS on how to optimize their 401k experience. I have a 62-year relationship with the stock market. I have been a stockbroker, finance professor and individual investor. Ten years ago, I appointed myself to the position of 401k guru extraordinaire. I have no investment products to sell. All I have to offer are the objective observations of one who has been there and done that.
401k Investing for Newbies and Nerds
Season 2 Episode 1 Your 401k, The Gift That Keeps on Giving
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The American economic engine is the greatest wealth producing machine the world has ever known. At the turn of the 20th century, it produced $4 billion in revenue for the American people. Last year it produced $30 trillion: A 4,000 percent increase. In 1900, a handful of individuals, known as robber barons, owned 70% of the nation’s assets. In 1950, less than 3% of the American population owned stocks. Today, 60 percent of American families own stock and 73 percent of the national wealth.
We can attribute the growth of the American economic engine to our capitalist system and the ingenuity and determination of the American people. The shift in the ownership of its output came about in 1975 with the introduction of the 401k program. The acronym, 401k comes from a section in the tax code which allows workers to deduct a portion of their wages and invest it in a tax-sheltered account, to be used later, in their retirement years.
The magnitude and importance of today’s 401k program is staggering. There are over 90 million plan participants, who own a total of $12 trillion in assets. In addition to this, there has been another 30 million Americans who have retired and rolled their assets over into an IRA, bringing the total value of the program to over $35 trillion. This is a figure 15 percent larger than the current Gross Domestic Product. And last year, these assets produced $1.5 trillion in additional wealth because their owners had the forethought and discipline to forego instant gratification and the dedication to wisely manage their 401k.