Your 401(k) marketing materials make the following message loud and clear.
401(k) participants do not have the necessary experience, training, or knowledge. They cannot manage their own 401(k) accounts. Your 401(k) provider (Schwab, Fidelity, Vanguard, etc.) offers a robo-advisor option. To save your 401(k) forever!
A robo-advisor is an online, automated portfolio management service. Modern Portfolio Theory dominates the robo-advisor algorithms. Combined with your answers to risk management questions. This tool can select the 401(k) retirement plan mutual funds you own.
The robo-advisors recommend you own an equal dollar amounts of various asset classes. U.S. stocks, Bonds, International stocks, and Money Market.
Robo-advisors remind you that no human being has any idea what mutual fund asset classes to own. Much less which specific mutual funds to own.
So, there is no chance for you to pick the lowest annual cost and best investment performance 401(k) mutual funds.
A robo-advisor spreads your 401(k) monies around all these available asset classes. They guess at what is working best now. And have no idea what is most likely to work the best going forward.
But wait. It even gets more nonsensical.
A couple of times each year, the robo-advisor recommends you sell the mutual funds in your 401(k) that are doing well. Then you buy more of the mutual funds that are not doing well. Code name: Rebalancing.
The robo-advisor and Modern Portfolio Theory have no idea “what is happening now.” They combine that expertise to guess at “what will work going forward.”
In what universe does that make any sense? This kind of an investment management strategy makes no sense in your 401(k) either.
What is your favorite sport? Let me assume that it is NFL football.
If you had to bet right now, what NFL team is most likely to win the Super Bowl next season? Any NFL football fan would make their choice from the handful of teams that won the most games last season.
The same logic applies to making the mutual fund choices on your 401(k) retirement plan menu. Why own even a little bit of the worst-performing mutual funds in your 401(k)? Invest more of your 401(k) money into the best mutual funds.
Because the algorithm told you to be “diversified?” If this were not so tragic a 401(k) investment management mistake makes, it would be a funny joke.
Ric Lager
Lager & Company, Inc.
