Two Beers, One Napkin and a 401(k)

 

What would you do if you found out your investment was earning 1% a year? Would you review your investment and make some changes or would you take a “wait-and-see” position?

 

The reality is that lots of good folks are sitting idly while their retirement plans wallow. The tragedy is that a good portion of these folks aren’t even aware of just how badly their plans are performing, or even worse, that they have the ability to alter their plans with some basic information.

 

Here’s a discussion I had in early 2013 with a close friend that proves my point.

 

Enjoying a couple of beers after a round of golf, my friend, Steve, boasted how much his retirement plan had grown over the past 13 years. Steve said he began with $50,000 in his plan and now his account was over $282,000.

 

Surprised at those impressive numbers, I inquired how my friend succeeded at his realized gain of $232,000.

 

Grinning from ear to ear like the Cheshire Cat in Alice in Wonderland, Steve told me, “I bought the Standard and Poor’s 500 Index (S&P500) at the end of 1999 and just left it there. I’m a ‘long term’ investor, you know.”

 

Being a veteran player in the investment game, Steve’s statement naturally peaked my curiosity.   Since 2000 there have been a host of sharp downward movements in the market. From the Asian flu epidemic to the tech bubble, Enron fiasco, 9/11, The Great Recession, the 2009 Economic Recovery that never was, and finally the European Debt Crisis, I was struggling with the notion that my friend could have discovered gold in down markets.

 

So I grabbed a napkin and a pen and asked Steve if we could demonstrate just how he did it. I told him to write $50,000 in the top left hand corner of the napkin and $282,000 at the bottom right corner. Then I asked, “Steve how much did you add each year in contributions to your retirement plan?”

 

“$15,000 every year,” he proudly replied.

 

“For all 13 years?” I inquired.

 

“Yep.”

 

I instructed him to multiply $15,000 by 13, and write the total in the center of the napkin.

 

He jotted down $195,000, thought for a minute and shrieked (and it wasn’t a very manly shriek), “Wait! $195,000 of my ‘gain’ was my own money — from my paycheck? That makes my real gain just a measly $37,000 after adding my own contributions.”

And without my prompting, Steve then divided his $37,000 gain by 13 years, and sheepishly wrote down $2,846.

 

“Steve, I estimate you’ve earned a little over one percent a year,” I said, feeling kind of sorry that I had initiated this little exercise.

 

While my friend motioned the bartender over for another beer he looked down and asked, “Roger, there’s no way I can retire if I keep this up, is there?”

 

“It’s going to be difficult,” I answered. “In hindsight, you would have been better off in a money market account and experienced a lot less volatility.”

 

“So is there a way I can be smarter about what I buy and when I buy it,” he begged?

 

“I think there is, Steve,” I answered. “Are you aware that there are two Standard and Poor’s 500 indexes?

 

I was referring to the investment vehicles that contain the same 500 stocks, but are bundled differently, are traded differently and produce different returns. One is “capitalization weighted” and the other is “equal weighted.”

 

The S&P 500 Index (SPX) is capitalization weighted in a way that is similar to how the U.S. Congress is weighted. The most populated states have the most representation (Congressmen) and the smallest states have the least. California has more votes than Rhode Island. The capitalization weighted S&P 500 gives most of the votes to the biggest stocks like Exxon Mobil.

 

Conversely, the equal weighted S&P 500 Index (RSP), gives an equal vote to every stock in the 500, similar to the U.S. Senate. In the Senate every state has two Senators. Rhode Island has just as many as California and Texas. So they have equal votes in the Senate.

 

Back in 2000 I began to explore exactly how these two markets traded. I ran a calculation called Relative Strength, which basically compared the capitalization weighted S&P 500 (Congress) to the equal weighted S&P 500 (Senate), to determine where to place investment dollars.

 

For the first time in more than seven years it revealed that the Senate was the place to be. To me this was huge news. But oddly enough, the major business media like Fox News, CNBC, The Wall Street Journal, Investor’s Business Daily never picked up on the story. And still today the business media only talks about the capitalization weighted S&P 500. When this reversal occurred it signaled a major change in our investment posture.

To make Steve even more depressed, I pulled out my iPad and demonstrated that from the beginning of 2000 to the end of 2012, the SPX was down close to 3% while the RSP was up nearly 89%.

“So why didn’t the retirement guy at my company tell me about this?” Steve asked. “Isn’t he supposed to be helping us?”

 

“Because that guy’s not paying attention,” I explained. “Most investors and their advisors are just riding the train and staring out the window at the pretty scenery. If they were paying attention you’d be in a much better position.”

 

The moral to this sad story is that you shouldn’t assume the company guy or your advisor is keeping an eye on your investments. The moral to this sad story is that you shouldn’t assume the company guy is keeping an eye on your investments. You’re the best person for that task. You see, investors with advisors who pay attention to their investments generally are the ones who make out a little better.

 

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Roger S. Balser is the Managing Partner and Chief Investment Officer of Balser Wealth Management, LLC with more than twenty-five years experience. He works one on one with individuals to help regain control of their investment and retirement portfolio(s). Roger’s addressed a host of professional organizations nationwide and weekly give his two cents on the popular “Two-Minute-Tuesday.” If you have any questions about the particulars of your investment portfolio or retirement plan at work, or would like to discuss potential opportunities within the equity market, please contact Balser Wealth Management, LLC, 36873 Harriman Trail Avon, OH 44011, 440-610-3012, roger@balserwealth.com, www.balserwealth.com

Roger S. Balser