Nick Hodge,
Publisher
Oct. 18, 2024
I rebalanced my 401(k) this month.
Yes, your editor has one of those as a function of our corporate structure. As part owner of an S-corp, I must pay myself a “reasonable salary.”
And since we decided to set up a quality safe harbor plan for our employees from inception, it was only reasonable for me to max it out every year with a portion of that reasonable salary.
The fund selections are limited. There are 40 funds total. There are ten bond funds that include everything from international to municipal. There are nine T Rowe Price target date funds. There are nine Vanguard index, sector, international and themed equity funds. And the balance are specialty funds with names like “growth opportunities” and “global equity income” offered by firms like Hartford or Janus Henderson.
The fees, or expense ratios, for these funds ranged from 0.04 for the Vanguard bond and stock market index funds to over 2.8 for Invesco to hold a basket of MLPs for you.
Your editor chose a mix of seven low-cost Vanguard funds. Half the allocation is in total market equity index funds. Another 35% is in rate-sensitive positions like we’ve been discussing in this letter — including the Vanguard REIT and Energy sector funds. The last 15% went into the Vanguard Mid-Cap Index Fund.
I made these allocations based on where I know we are in the cycle. I did it without consulting any charts, and certainly without paying for any financial advice. It took me 15 minutes.
I take this for granted.
You might as well.
As a reader of this letter, you might be among the record high number of 401(k) millionaires in America. As CBS reported in August:
The number of "401(k) millionaires" — 401(k) plan participants with balances of at least $1 million — has reached a record high, new data from Fidelity Investments shows.
As of June, there were roughly 497,000 so-called retirement-created millionaires in the U.S., according to the wealth management firm, which analyzed balances across 26,000 of its customers' accounts. Nearly 399,000 Americans also have at least $1 million in an individual retirement account.
Those folks likely know the benefits of low-cost indexing, compounding, and setting savings and investments on auto-pilot. They also have the benefit of time, as the average account age of those seven-figure savers is 27 years.
While it’s true the number of retirement-account millionaires is at highs, that headline and lead belie the stark reality, which gets buried in the article like it gets buried in our subconscious:
Although there are more 401(k) millionaires than ever, research shows that most Americans are woefully unprepared for retirement. Overall, the average 401(k) balance is just over $127,000…
And another recent study on Gen X's retirement readiness found that half of those surveyed believe it would take a "miracle" for them to be able to retire.
Classic tale of two cities, perhaps. But definitely another symptom of the wealth inequality and K-shaped recovery that’s been driven by — and made worse or better depending on your understanding of and planning for — the inflationary policies pursued by both elected and unelected officials in the US and around the globe.
Because it wasn’t just Jerome who slipped 50 basis points of sawdust into your ersatz monetary system. As Reuters reported earlier this month, “Five of the nine central banks overseeing the 10 most heavily traded currencies that held meetings in September lowered benchmarks.”
They also lowered the purchasing power of those currencies, which is one reason why commodity prices are back on the rise, rate-sensitive sectors continue to perform, and gold remains near all-time earthly highs.
As the asset owners and 401(k)-millionaire class, we can easily own that inflation in our brokerage account and real estate holdings.
What got me thinking about all this recently, in addition to Q4 rebalancing, was Jackie, the lovely lady who’s been helping us clean our house since we moved to the Pacific Northwest seven years ago. She was first with an agency, but we hired her on and supported her with referrals when she started her own business. She now routinely attends our summer swim parties and BBQs.
Jackie is pretty open about the fact that she didn’t make the best decisions earlier in life. And that’s left her buried in the bottom half of that retirement article.
Until last year, when she came into a six-figure inheritance. She came to me asking what to do with it, and I wrote her a two-pager on what accounts I would open and what I would buy if I were her.
And then she put it all in a certificate of deposit.
Jackie came to me again recently and said the term on her CD was almost up, and she wanted the info I had given her again so she could invest her money in a more efficient manner.
And while I was talking with her, I realized that I needed to give her the information in a completely different way.
She had no idea what a Roth IRA or Traditional IRA was… which one she qualified for… or where to open one up.
She didn’t know what a brokerage account was. Or an index fund. Or a dividend reinvestment plan.
Like rebalancing my 401(k) or knowing to forego an advisor and use low-cost funds, I take knowing all those things for granted.
If you’re reading this, you probably do too.
But if you need to get up to speed on some of those things, everything I told Jackie is already in one of the reports you get as a member of Foundational Profits, which I took the liberty to update this month.
It’s called, “Your Personal Portfolio Protection Plan”, and goes through how to get your financial house in order and ready to manage yourself, including which types of individual retirement accounts (IRAs) and brokerage accounts to open.
If you’re like Jackie, that report is a great place to start and worth the small price of admission to Foundational Profits all by itself. You can learn more here.
But beyond that report, I don’t spend much time on the nuts and bolts of retirement accounts and taxes.
Instead, Foundational Profits is about showing you — literally — what I’m buying in those retirement accounts. It’s about managing your money for the long-term in a low-risk way without paying an advisor a percentage of your nest egg every year.
That is not to say I made my wealth over the long-term in a low-risk way. Au contraire.
I haven’t even been out of high school for the 27 years the average million-dollar Fidelity account has been open.
Most of what I have came fast-and-furious in the post-2008 zero-interest-rate-policy (ZIRP) boom by saving every penny from a burgeoning publishing career and parlaying that into some very successful speculations.
I still speculate (we are participating in private deals this month that you can access here), but I’ve since had three kids, grown a bit risk averse, and manage a portion of the Hodge nest egg in the manner you can read about every month in Foundational Profits.
As a member, you get to see how much I own of each position in the model portfolio, when to buy it, and what price to buy it under. So you can copy it directly or use it to make your own portfolio decisions.
Here is what members saw this month:
If that report or the allocations in the model portfolio interest you, you can learn more about Foundational Profits here or call 844-344-4700.
Call it like you see it,
Nick Hodge
Publisher, Daily Profit Cycle