How To Avoid A 401(k) Meltdown If The Trump Rally Fizzles

Millions of Americans are asking the wrong questions when it comes to their retirement plans. It’s not “how much should I invest now?” or “is the market safe?” You should invest as much as you can in every kind of market.

So forget about the question of whether the “Trump rally” is over, or taking a pause. If that’s your concern, you’re focused on the wrong thing.

Despite this reality, far too many investors are trying to find the right fund manager who can somehow predict and navigate the rocky seas the market will toss up. In rare cases, some managers get lucky and get in and out at the right time. But most don’t have this ability.

Most of us want to believe that professional money managers know just when to get in and out of stocks. We put a lot of faith in them — and mis-spend some $2 trillion in fees hoping that they’ll be right and protect our money.

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The numbers don’t lie, however. Most managers can’t do better than passive market averages and rarely outperform after you subtract their fees. So if you’re placing your trust in active management, you’re headed for a meltdown sooner or later.

A recent study by Jeff Ptak at Morningstar shows the folly of active management for most investors.

Ptak looked a the relationship between what actively managed funds return to the fees they charge for management. In most cases, expenses will cancel out most significant gains.

“Fees haven’t fallen that steeply, and, as a result more than two-thirds of U.S. stock funds levy annual expenses that would wipe out their estimated future pre-fee excess returns.”

What this means is that active managers who time the market aren’t likely to outperform passive baskets of stocks. When you subtract their fees, you’re not coming out ahead.

Fees take an even bigger bite when overall market returns are lower. If stocks return less than double digits, you’re going to feel the pain even more.

Ptak is blunt in his conclusion: “Many active stock funds are too expensive to succeed. The exceptions are small-cap funds, where it appears fees are still below estimated pre-fee excess returns.”

What can you do to avoid the meltdown of overpriced, actively managed funds? It’s a pretty simple process.

1) Find the lowest-cost index funds to cover U.S. and global stocks and bonds. Expense ratios shouldn’t be more than 0.20% annually (as opposed to 1% or more for active funds).

2) If you still want active funds in your portfolio, they should be highly-rated managers who invest in smaller companies.

3) Make sure that the “active” part of your portfolio is no more than 30% of your total holdings. While this is an arbitrary percentage, it will provide some buffer against market timing decisions.

You should also avoid the error of picking funds based on their past performance, which can never be guaranteed. So, instead of asking how they performed, you should ask “how many securities can they hold for the lowest-possible cost.”

 

Airlines Pocket Record $38B from Extra Fees

© Provided by CNBC
© Provided by CNBC

When something works—and works well—you stick with it.

That’s the approach that airlines across the globe are taking, as a new report found ancillary fee revenue grew at a double-digit pace last year.

In fact, despite grumblings from passengers about additional charges, revenue from checked bags, changed reservations and a host of other additional fees jumped nearly 21 percent to an all-time high of $38.1 billion, according the annual study by IdeaWorksCompany and CarTrawler.

“This report shows ancillary fees have become a reliable source of revenue for airlines, and airlines know what they can do to increase it,” said Jay Sorensen, president of IdeaWorks.

The growth in revenue from these fees is staggering. In 2007, for example, airlines collected just $2.45 billion in ancillary revenue.

Other numbers showing the growth in airline fees include:

• Ancillary revenue per passenger among 63 airlines worldwide was $17.49, an 8.5 percent increase compared to 2013;

• Low-cost carriers collected more than $2.9 billion, an increase of 32.8 percent year over year;

• Ancillary revenue among major U.S. airlines jumped more than $2.6 billion, or 18.7 percent.

Among the largest airlines in the world, United  (UAL) collected the most in ancillary fees, topping $5.8 billion, according to IdeaWorks. It was followed by American/US Airways  (AAL) at $4.65 billion, and Delta  (DAL) with more than $3.2 billion.

Sorensen said airlines are doing a better job selling perks such as early boarding, or seats with more legroom. Increasingly, he sees airlines successfully selling customers on extras when they check in for flights online or at airport kiosks.

“The sale of those à la carte items is very successful because the airlines can tailor that offer to you,” he said.

With carriers already pushing fees for checked bags, early boarding, and snacks or meals on planes, Sorensen said many are eyeing in-flight entertainment as a means for future growth in ancillary fees.

“More airlines are saying, ‘We will provide a base level of Wi-Fi access and then if you want to upgrade beyond that, say to check email or watch a movie, you can pay for that,'” he said.

Written by Phil LeBeau of CNBC

(Source: CNBC)