401ks,  Return on Investment

Ten Is the New Four

It used to be saving 4% of your income over the 40 working years to retirement (22 to 62) would be enough to get you to 80% of your annual salary. Now financial advisors and financial firms are recommending 10%! The reason? Using current financial planning software, modern portfolio theory and asset allocation mathematically reduce returns. Our goal at Adams Financial Concepts LLC is to get you to your goals using our own approach which we feel will give you superior returns.

One of my son’s high school teachers during parent orientation to the school asked this question: If you wanted to buy a $40 item and were offered a choice in how you paid, which option would you choose. The store offered a discount. You could take a 10% discount on the item and pay sales tax of the discounted amount or you could pay full price plus sales tax and take the 10% discount on that amount. Which would you choose?

The answer is that both ways resulted in you paying the same amount. Work out the math and you can verify that for yourself. The reason is that multiplication is commutative: (axb=c) is the same as (bxa=c).

That is the reason that 10% is the new 4%. Why do I say that?

Most people are familiar with the pyramid of financial assets or pyramid of investing:

The idea is that investors should have a decreasing percentage of assets as you move up the pyramid. The “Safe Money” is in the bottom part of the pyramid. Whether it is called asset allocation or the pyramid of risk, it works in a similar fashion. The money invested in the bottom of the pyramid has a low return. Whereas stocks (equities) have over the period from 1926-2013 had achieved better than 10% annually, the so called safe money yields were about 2% annualized for that same period of time.

With asset allocation returns are very likely reduced over that 40 year period of time between beginning a career and retirement.

If returns are 4% instead of 10%, then instead of saving 4% investors need to adjust savings upward to 10%. 10 becomes the new 4!

At Adams Financial Concepts LLC we are committed to a goal and so state in our ADV filed with regulators that we strive to do better than the benchmark for our client accounts over the longer-term (5 to 10 years). We believe this means greater security to withstand those corrections and bear markets. We do not achieve that on a quarterly basis and we will have years when we underperform, but over the longer-term we are guardedly optimistic about our goal for clients. We do report our actual performance and you can check it out here.

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