7 Reasons Why IRA/401k Investment in Equities is Hazardous Risk

  1. Growth of investment principal or equity with stocks generally has little to do with intrinsic Company asset value or earnings, i.e. equity values are not rooted in business fundamentals. Price/Earnings (P/E) ratios and Price/Sales ratios (P/S) are at some of the highest levels in history.
  2. Stock prices are extremely speculative and always requires more buyers than sellers. The last selling price of a stock inflates portfolio ‘value’. Numerous back and forth buying of stock artificially pump up prices causing everyone to think they are gaining real dollars and wealth. But, as soon as sellers outnumber buyers, stock prices inexorably fall, and the portfolio principal value drops. So-called money (principal) simply vanishes into thin air.
  3. Trustee fees and commissions will reduce principal accumulation.
  4. Being a passive investment, all dividends and any realized equity increases are fully taxed at your highest marginal tax rate, which greatly reduces realized profits.
  5. Annual loss deductions are severely capped and time-limited.
  6. If there should ever be a mass investor recall on Mutual Funds and considering hypothecation (look it up) there is serious question whether Investment Banks, Brokerage Firms, or Hedge Funds would be able to cover refund of investor’s equity in that situation even if the equity value has been severely reduced.
  7. Inevitably, Market ‘bubbles’ are created and eventually bust, on average every 7 years. These market collapses can cause, and have in years past, devastatingly huge reductions of 20%, 30%, 40% or more in IRA/401k principal value, literally overnight.

Impending Market Crash – Very Troubling

This last point should be very troubling for anyone that is counting on stock equity investment assets for their future retirement income as the ‘Market’ is running on borrowed time. It is especially disconcerting for someone nearing retirement.

Let’s say the Market crashes beginning next month to eventually drop by 40%. [We believe the next crash will more likely be closer to 60%.]

DJIA, major crashes:

  • 1932 crash = ~73.6% drop from ’29 high, 30 years to recover
  • 1974 crash = ~50.0% drop from ’72 high, 20 years to recover
  • 2001 crash = ~32.5% drop from ’99 high, 7 years to recover
  • 2008 crash = ~46.4% drop from ’07 high, 5 years to recover by artificial fix

Overnight, your $1,000,000 ‘nest egg’ becomes $600,000. Poof, you’ve just lost $400,000 in much needed principal. Principal that you were counting on to provide the supplemental income needed for retirement.

Very real, potentially catastrophic risk with passive equity investment

Even worse, let’s say you are only 6 years from retirement age. Just to get back to the previous value in your IRA/401k accounts after a crash would mean you would need to average roughly 9.0% in annual portfolio growth every year. This is extremely highly unlikely to happen after the Market has crash.

We have witnessed this happen time and again in so many cases where a retiree was counting on their IRA/401k to provide substantial retirement income only to have the market crash within five years before retirement and they never had a chance to recover the principal that vanished.

The recovery period after the 2007/8 crash was due principally to manipulations (rigging) through outlandish Government spending such as the $1 Trillion Stimulus Spending (TARP), Quantitative-easing where the Federal Reserve created trillions of dollars out of thin air and injected an insane amount of hot money into the financial markets driving up ‘values’. And let’s not forget the artificially low interest rates that the Fed orchestrated that also caused stock prices to rise with lots of ‘cheap’ money.

Just Band-aids and Not Real Solutions

The problem is that these measures were just band-aids and not real solutions to the underlying cause of the last collapse. In other words, the can was kicked down the road and they are out of tricks to solve much less prevent the next equity market crash making the correction likely to be substantially worse than 2008 was.

The picture gets even uglier the longer the inevitable crash holds off, if for even a few more years.

Bad Times for the Stock Market Have Arrived

Now, QE has been phased out and the Fed has been aggressively raising interest rates throughout the year (2018). The result: stagnant stock growth throughout the year and negative asset values YTD.

This is what Deutsche Bank’s Craig Nicol calls “a quite fascinating statistic” namely that as of the end of October, 89% of assets that Deutsche Bank collects data on for its annual long-term study, have a negative total return year to date in dollar terms. This is the highest percentage on record based on data back to 1901, eclipsing the 84% hit in 1920.

Avoid the Risk from a Catastrophic Stock or Bond Market Crash

  • Oil and natural gas are among the few assets that have increased in value YTD.
  • Investing in oil and natural gas wells is investing in a tangible asset – oil and gas reserves – not ‘poker-play’ assets.
  • Revenue income derives from production of a tangible product – not wishful speculation.
  • Double-digit yields are entirely plausible through a well-managed prospect portfolio.
  • 180% tax deductions through investment payback are realized from oil and gas projects.