If you pay attention all to your company 401(k) retirement plan online marketing materials, the following message comes across loud and clear.
Individual company 401(k) retirement plan participants do not have the experience, training, knowledge, or access to the most up-to-date investment management tools. For that reason, your company 401(k) retirement plan provider (Schwab, Fidelity, Vanguard, etc.) has probably added a robo-advisor option to your company 401(k) retirement plan menu of options.
A robo-advisor is an online, automated portfolio management service. Modern Portfolio Theory is automatically built into the robo-advisor algorithms. That math, and your answers to risk management questions select the company 401(k) retirement plan mutual options you own.
The robo-advisors will recommend that you own a fairly equal dollar amounts of various different asset classes—U.S. stocks, Bonds, International stocks, and Money Market.
Basically, the robo-advisor acknowledges that fact that no human being has any idea whatsoever as to what asset classes (and specific mutual funds in those asset classes) provide the lowest annual costs and best investment performance on your company 401(k) retirement plan menu.
So, the robo-advisor spreads your 401(k) monies around all these available asset classes because they have no idea what is working the best now, and what is most likely to work the best going forward.
But wait. It even gets more nonsensical.
Then, twice each year, the robo-advisor recommends that you sell the mutual funds in your company 401(k) retirement plan account that are doing well, and buy more of the mutual funds that are doing poorly. Code name: Rebalancing.
Clearly, the robo-advisor and Modern Portfolio Theory have no idea “what is happening now” and is at best guessing at “what will work going forward.”
In what universe does that make any sense? If you have not guessed already, that kind of an investment management strategy makes no sense in your company 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 knowledgeable 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 company 401(k) retirement plan menu. Why would you own even a little bit of the worst-performing mutual funds in your 401(k), if you could invest more of your money into the best mutual funds?
Because the algorithm told you to be “diversified?” If this was not so tragic of an investment management mistake that many individual investors make, it would be a funny joke.
Ric Lager
Lager & Company, Inc.
