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| Personal finance potpourri |
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Take the average Joe, who earns $40,000 a year, beginning
at age 28, and gets 3-percent pay raises annually. He defers only
2 percent of his salary every year, even though he would get a match
of 50 cents on the dollar up to 6 percent. He invests in a conservative
mix of funds and doesn't rebalance or change his asset allocation
for 14 years. At age 42, he's making $60,500. If he invested in
bottom-tier funds, his 401(k) would have grown to $39,700 in that
time. If, instead, he had invested in the best-performing funds
(because he had a crystal ball), his account would have grown to
nearly $41,900, or $2,200 more. Moral of the story: Fund selection
isn't really that important as a determinant of retirement wealth.
Well, that's an interesting assertion, coming from
a fund firm with a lineup of stock funds that have mostly produced
mediocre returns when compared with their peers. Over the five years
ending in September, nearly two-thirds of Putnam's domestic and
global funds ranked in the bottom two quartiles, according to information
gleaned from Morningstar.com.
Over three years, the funds' category rankings improved a bit, with
only 62 percent ranking in the bottom half. Among those stock funds
with a 10-year history through August, three-quarters fell in the
bottom half of category rankings.
So, if a fund company can't come up with stellar funds,
it instead comes up with a study called, "Missing the forest
for the trees," that essentially claims that fund performance
doesn't really matter all that much?
If we shouldn't be looking at the trees, gnarled as
they may be, what should we be focusing on? More than anything,
deferral rates affect wealth accumulation, the study concludes.
For example, if Joe defers 4 percent rather than 2 percent of his
income, he would have $79,500 in his 401(k) -- or nearly
twice as much saved up. "A 4-percent deferral would have had
90 times the impact of changing underlying funds," according
to the study. "The performance of the underlying funds becomes
a virtually meaningless statistic when compared to the impact of
a higher deferral rate."
Whatever. All kidding aside about Putnam fund performance,
the study makes an important point, and though it may be obvious,
it's one that many people miss. The proprietary study looks at various
contributors to performance: asset allocation, rebalancing versus
not rebalancing, investing in top and bottom-quartile funds, switching
funds every three years, index fund performance and contribution
rates. All these variables change the wealth equation to some degree,
but none as dramatically as the amount you contribute to your plan.
So here's the takeaway: Since you really can't predict
which stocks or funds will outperform in the future, take control
of your retirement wealth by deferring as much as you can possibly
afford.
Longtime financial journalist Barbara Mlotek Whelehan
earned a certificate of specialization in financial planning.
If you have a comment or suggestion
about this column, write to Boomer
Bucks.
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