Naked Truth Investing: Why yes, you do need another column about retirement

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This is the first in a new series of columns called "The Naked Truth," by retirement expert Dan Solin. Please bring him your questions, in the comments box, and he will answer as many as he can.

Is there really a need for another financial column that answers your questions about retirement planning?

Here's the naked truth.


"Stock picking skill" is an oxymoron. A few people get lucky. Don't confuse luck with skill.

Market timing fares no better. One study looked at the results of twenty-five market timing newsletters over a 10-year period. Their average return significantly underperformed both the S&P 500 index and the Wilshire 5000 index.

Fund manager picking is also a negative sum game. Over an 11-year period, only 14% of the top fund managers in one year were able to repeat their performance in the following year.

If the "experts" can't pick stocks, time the markets or pick mutual funds that will beat the markets, why should you pay attention to them?

You shouldn't.

Focus on whether you should be exposed to any market risk. Many investors should invest only in FDIC insuredCertificates of Deposit or Treasury Bills.

If you can tolerate market risk, you should determine your asset allocation -- the division of your portfolio between stocks, bonds and cash. Then you should limit your investments to a globally diversified portfolio of low cost index funds, passively managed funds or exchange-traded funds.

When it comes to investing for retirement, this can be very difficult to do. Retirement planning for most people is their 401(k) plan. These plans make a fatal assumption: Every employee is qualified to be her own Chief Financial Officer, even if she doesn't know the difference between a stock and a bond.

It gets worse.

Most 401(k) plans are loaded with Porky Pig fees and a bewildering selection of high expense ratio, under performing, actively managed funds, It is practically impossible for employees to make intelligent investment choices.

So, why a column that will give you the straight talk on retirement planning?

Because the naked truth is all that stands between retirement with dignity and being out in the cold.

Dan Solin is the author of The Smartest Investment Book You'll Ever Read (Perigee Books 2006) and The Smartest 401(k) Book You'll Ever Read (Perigee Books, June 24, 2008). Visit his website at Smartestinvestmentbook.com.
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