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Buffett’s investment lesson

By Jennie L. Phipps ·
Thursday, February 9, 2012
Posted: 5 pm ET

Fidelity Investments, which manages more 401(k) accounts than any other company, released a good-news/bad-news quarterly retirement planning report today.

The good news is employees are saving more, and employers are shelling out more in matches. Employee contributions rose in 2011 to $5,750, up from $5,680 in 2010. At the same time, employers kicked in an average $3,270, up from $3,170 the year before. In all, workers saved an average of more than 8 percent of their annual salaries.

The bad news is that, even though workers and employers were contributing more, the average accumulation for participants in a Fidelity plan was $69,100, down $300 from 2010, the company said. The reason was lousy returns. The stock market did OK in the spring, then took a nose dive in the summer.

Some 25 percent of participants had all their money in target date funds that invest more aggressively when a worker is young and less aggressively as retirement grows closer. Recently, there has been criticism of the 401(k) industry's push toward target date funds. For instance, Kent Smetters, an economist and a professor of public policy at The Wharton School of Business, argued in a paper that he wrote for the National Bureau of Economic Research that people who invested on their own actually do better than those who surrender decision-making to target date funds.

Fidelity says that's not its experience. Of participants who were in a Fidelity plan for 10 years and took on more risk in their investment portfolio than they would have gotten by investing in an appropriate target-date fund, 62 percent made less than they would have made in the target date fund.

If you are offered the opportunity to put your 401(k) in a target date fund, examine it carefully. They are not all created equal. And try not to be too scared to take at least some risk. In his latest letter to shareholders of Berkshire Hathaway, Warren Buffet, America's greatest investor, urged people to stick with stocks. He pooh-poohed bonds as a safe investment because they simply aren't paying enough. "Right now bonds should come with a warning label," he said.

Buffett also dismissed fixed assets like gold, "[Gold is] incapable of producing anything. You can fondle the cube, but it will not respond."

Berkshire's investment goal in 2012, Buffett said, "will be to increase its ownership of first-class businesses. Our first choice will be to own them in their entirety -- but we also will be owners by way of holding sizable amounts of marketable stocks. I believe that over any extended period of time this category of investing will prove to be the runaway winner. ... More important, it will be by far the safest."

You can bet against that conclusion, but my money's on Buffett.

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