Before the invasion of the target date funds, most 401(k) planinvestors were encouraged to leave their assets in funds thatgenerally contained 100 percent stocks. Despite this, far too manyemployees opted for the “safety” of stable value funds. While thelack of volatility does indeed sound safe, it is anything but. Forthat reason, Congress passed the Pension Protection Act in 2006,which was, in part, meant to encourage retirement savers to moveaway from the “safety” of fixed income or stable value options intowhat many professionals acknowledged as more appropriateinvestments for long-term investors. Namely, equities.

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The significance of these “more appropriate” investors is rarelydiscussed. Some simply assume the long-term superiority ofequities. Others view them as a single arrow in the quiver of assetclasses, neither better nor worse than any other arrow. Thenumbers, however, present a much less forgiving reality.

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Investing for retirement is a very long exercise. We're nottalking years, we're talking decades. And by decades, we're talkinga lot closer to a century than not. For example, assuming a lifeexpectancy of nearly 90 years, the number of years one invests forretirement is about 70 years. Of that, for at least 40 years,retirement assets are considered “long-term,” i.e., it will be atleast five years before they are used. Those numbers emphasize the“long” in long-term.

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The return numbers for that time period leave little doubt ofthe power of equities. Over all 40 year periods, a portfolio of 100percent stocks produced the highest annual return, compared to anyother asset allocation. That should surprise you. It's expectedthat the riskiest asset class produces the higher investmentreturn. On the other hand, these other results will likely surpriseyou. That same 100 percent stock portfolio, in an analysis of 40year returns, not only also has the highest median return, but itsworst return is also the highest compared to all other assetallocations.

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Not even the much beloved 60/40 equity/bond split comes close toa pure 100 percent equity portfolio. The 100 percent portfolio'smedian return is about 1.5 percent better than the 60/40 splitportfolio. In terms of the worst performance of those 40-yearperiods, the 60/40 asset allocation lags the 100 percent stockportfolio by 2 percent per year! They like to make a big deal aboutpaying 1 percent more a year in fees. Now double that and you'llsee the real price of those “safe” portfolios.

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It's no wonder retirement savers love their 401(k) plans. Themore successful participants are proof of the long-term reality of100 percent equity portfolios. This is especially instructiveduring those quite normal periods of cyclical downturns. When themarket falls, it feels like forever. The naïve panic, lured by the“safety” of the short-term. One of the hardest jobs of thefiduciary is preventing investors from making knee-jerk reactionsthat are not in their own best interests.

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Christopher Carosa

Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).