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Arnott: Are 401(k) Investors Fighting Yesterday

Arnott: Are 401(k) Investors Fighting Yesterday's War?




1. See “Was it Really a Lost Decade?” January 2010, Fundamentals, which showed that the “lost decade” was only lost to those who pursued an equity-centric approach to investing, and then anchored their stock holdings to a cap-weighted index. Unfortunately, most investors made both mistakes.

2. The BarCap Aggregate Bond Index is used as a proxy for bond returns and the S&P 500 Index as a proxy for stocks. This 60/40 portfolio was rebalanced monthly.

3. See “401(k) Plan Asset Allocation, Account Balances, and Loan Activity in 2008,” October 2009, Issue Brief, Employee Benefit Research Institute, no. 335. EBRI data show the average stock allocation over the past decade has been 67% stocks and 33% bonds.

4. See “The U.S. Retirement Market, First Quarter 2010,” August 2010, Research Fundamentals, Investment Company Institute. Asset allocation calculated based on the assets invested in mutual funds in 401(k) plans. As of Q12010, 70% are stock funds, 24% are bond funds, and 6% are money market funds. Prior to the market crash in Q42007, the allocation was 79% stock funds, 17% bond funds, and 4% money market funds.

5. See “Fidelity Reports 2Q 2009 401(k) Trends,” August 12, 2009, Fidelity Investments. About 68 percent of 401(k) contribution dollars in the first half of the year went to equities. That number has hovered around 75% for the past few years and topped out at over 80% in 2000.

6. See “The 3-D Hurricane Force Headwind” and “Debt be not Proud,” November 2009 and August 2010, respectively, Fundamentals.

7. It bears mentioning that in a 2003 Financial Analysts Journal Editor’s Corner (“The Mystery of TIPS”), I suggested that the natural yield for long-term TIPS was about 1.4%, far below any yield that had ever been on offer until recently.

8. Two quintessential studies confirm returns chasing by investors meaningfully reduces ending wealth. Dalbar (“Quantitative Analysis of Investor Behavior,” 2004) found that over the 20-year period ended December 2003, the S&P 500 Index returned 13% per annum and the average stock fund investor earned just 3.5%! A year later, Russel Kinnel (“Mind the Gap,” Morningstar Advisor, July 26, 2005 found the average investor lagged the return of their chosen funds by 2–3% per year by timing their entry and exit points badly, chasing the hottest funds.

9. See Russel Kinnel’s “Bad Timing Eats Away at Investor Returns,” February 15, 2010, Morningstar. This shortfall is defined as the difference between reported fund returns and dollar-weighted returns that investors achieved in the same fund over the same time span. If dollars pile in at the top and out at the bottom, of course the dollar-weighted return will be lower, which is exactly what history suggests. The broader asset classes showed lower investor shortfall returns: U.S. Large Caps,–0.32%; U.S. Small Caps, –0.79%; International Equities, –0.51%.

10. See “A Complete Toolkit for Fighting Inflation,” June 2009, Fundamentals. We found many of these stealth inflation fighters have a stronger relationship to inflation than traditional inflation hedging assets. Indeed, some of the traditional “hedges” don’t hedge at all; some drop when inflation rises!

© Research Affiliates®, LLC 2010. The material contained in this newsletter is for information purposes only. This material is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument, nor is it advice or a recommendation to enter into any securities transaction. The information contained herein should not be construed as financial or investment advice on any subject matter. Neither Robert D. Arnott nor Research Affiliates and its related entities warrants the accuracy of the information provided herein, either expressed or implied, for any particular purpose. Nothing contained in this newsletter is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this newsletter should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.


ROBERT ARNOTT, Chairman and Founder of Research Affiliates, LLC.



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