man on a boat made of a dollar bill headed towards destruction

Why 401(k)s and mutual funds are the path to retirement disaster

Ask yourself honestly, “Are You an Investor or a Gambler?”

Many people who have a 401(k) plan consider themselves to be investing for retirement. Yet, they often have no idea what they are investing in, and in many cases, have no idea how those “investments” are performing. Rather, they mindlessly put money aside into these retirement vehicles, often justifying the passivity of these efforts because they get a match from their employer.

My question is, if you don’t know what you’re investing in and you don’t really know how your investment is performing, how can you really consider yourself an investor? And even more, how can you know if you are secure for retirement?

The short answer is: you can’t and you don’t.

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The American retirement crisis

Why is this so important? Because America is facing a retirement crisis of epic proportions. As NBC News reports :

A new GAO analysis finds that among households with members aged 55 or older, nearly 29 percent have neither retirement savings nor a traditional pension plan. Even among those who do have retirement savings, their nest eggs are small. The agency found the median amount of those savings is about $104,000 for households with members between 55 and 64 years old and $148,000 for households with members 65 to 74 years old. That's equivalent to an inflation-protected annuity of $310 and $649 per month, respectively, according to the GAO.

Of all Americans who have savings for retirement, most are invested in 401(k)s stuffed with mutual funds, which are exposed to systemic risks , e.g., if the market falls they fall.

The problem is that many think that by investing in mutual funds that they are diversifying, but they are not. As Rich Dad Andy Tanner shared a while back, “Diversification is stupid,” and it doesn’t work.

So, we have a large portion of Americans with next-to-no retirement savings and an even larger portion in 401(k)s stuffed with mutual funds that could all go down together with another stock market crash like the one in 2000 and 2008.

So, what’s the answer?

Digging deep vs. diversification

Rather than “diversify” in paper assets, you must increase your financial knowledge through financial education. Pick an asset class you’re interested in—real estate, business, commodities, paper assets—and dig deep. Learn all you can and play the game of real investing, not just gambling on your 401(k).

For many, this means getting more educated on paper assets, as they are the easiest to get into, more liquid, and can be done in your spare time (to begin with).

Personally, I prefer real estate, business, and commodities, but if you want to know more about the technical side of paper assets, look no further than Andy. He’s the expert I turn to when I’m investing in stocks, and he’s the expert you should turn to as well.

Additionally, as you learn more about each asset class, I invite you to consider Rich Dad Coaching, where you can build your financial knowledge and become an expert in whatever asset class you choose.

With the world stock markets taking the average investor for a whiplash roller coaster ride, now is an excellent time to change the way you approach your retirement. It will be the smartest investment decision you’ve made all year.

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