CHAPTER TWO: YOU CAN KISS THOSE FIRST SEVEN YEARS GOOD-BYE

[transcript]

Dangerous Don:  Welcome back, folks!  Welcome back to the MACHO INVESTING blog!  Home of the stock market millionaires!  I’m your host, Dangerous Don, one of the greatest stock market investors of all time, and. . . . .

Johnny:  And I’m the official co-host, Johnny.

Dangerous Don:   And this is Johnny Doorknob . . . .  world-famous Scranton financial guru!

Johnny:   If you say so.  We both live in Scranton.  Which kinda says it all.

Dangerous Don:   So, Johnny. . . . you recently retired?

Johnny:  Yes, sir.   From now on, I take it easy.   Enjoy Nature.   Stop and smell the roses.  Shoot a few deer.

Dangerous Don:   Sounds great!   And speaking of retirement. . . . .  folks, today we’re going to talk about 401(k)’s.   Everybody’s got a 401(k), right?

Tana Marie:   Only people who have jobs.

Dangerous Don:   Ahh, yes. . . . MOVING RIGHT ALONG!   Folks, that voice you just heard was my lovely wife, Tana Marie.

Johnny:  Don. . . . . before we talk about track records for your average 401(k). . . .  which has been completely miserable. . . . . I’d like to say a few words about the management fees.

Dangerous Don:  Okay.  You’re on the air.

Johnny:   Your average 401(k) gets hit with fees around 3%.  That’s 3% of assets.  Every year.

Dangerous Don:  Those are fees for. . . . like. . . . investment advice, right?

Johnny:    Some of them.   The mutual funds inside your 401(k) usually charge about 2% of assets.   But, in terms of fees, that’s just the tip of the iceberg.   They’ve also got revenue-sharing fees.  Wrap fees.  12(b)-1 fees.   Sub-transfer agent fees.

Dangerous Don:  Wow!  So. . . . all this adds up to around 3% a year?

Johnny:   Or more.  Let’s say on average 3%.

Dangerous Don:  Actually. . . . that ain’t so bad.  Heck, sales tax is 4%.

Johnny:   Don, let me tell you, those 3% fees are going to wipe you out.

Dangerous Don:   How do you figure?

Johnny:   Let’s go back to that first dollar you ever put into your 401(k).   Two weeks after you were hired.   From your first paycheck.

Dangerous Don:  Okay, sure!  I mean. . . . . my first paycheck. . . . that goes back a few years!

Johnny:  Let’s say you work for 40 years, before you retire.  I worked for 45 years, but that's longer than most folks, so let's say 40 years.

Dangerous Don:  Okay.

Johnny:   So. . . . okay, now you retire.  And now you take your money out of your 401(k), right?   So, that first dollar is finally going to come back out, right?

Dangerous Don:  Sure hope so!  You put it in, you take it out at the end.

Johnny:   But how much of it will be left?  Management fees for your 401(k) are 3% every year, remember?

Dangerous Don:   Right.

Johnny:   So. . . . your first year on the job, when you were first hired, they took out 3 cents out of every dollar you put in, right?

Dangerous Don:    Ahhhh. . . . . . . I guess that’s right.

Johnny:  Second year, another 3 cents.  Now, you’ve paid a total of 6 cents out of that first dollar you put in.

Dangerous Don:   Right. . . .

Johnny:   Third year, they take out another 3 cents.    Now, you’ve paid 9 cents in fees out of that first dollar you put in.

Dangerous Don:   Jeez. . . .

Johnny:  This goes on for 40 years.  Every year, they take out another 3 cents in fees from that first dollar.

Dangerous Don:   Jeez. . . .

Johnny:   So, when you retire after 40 years, that first dollar was gone a long time ago.

Dangerous Don:   Wait a minute. . . . that's crazy!

Johnny:  In fact, at 3% a year, that first dollar was gone as of Year 33.   Seven years before you retire.

Dangerous Don:   No way!

Johnny:  Think about it.  If you work for forty years, every dollar you put into your 401 (k) during the first seven years years of working. . . . .

Dangerous Dave:  Disappears?

Johnny:   Disappears.

Dangerous Don:  I’m a little. . . . . what can I say?. . . . . stunned by all this.

Johnny:   You’re wondering. . . . . can it really be that bad?

Dangerous Don:  Exactly.

Johnny:  The good news is that the fees are actually the second worst thing about 401(k)’s.  If the stock market keeps crashing every six or seven years, losing 50% or 60% each time, most people won’t have anything left in their 401(k) anyway.  

Dangerous Don:   Boy, that’s good news.

Johnny:  More on this next time, right Don?

Dangerous Don:   Right you are, Johnny.  But right now, unfortunately. . . . folks, we’ve run out of time.

Johnny:  So. . . . here's what I'm supposed to ask you. . . . . Don, what's the motto of  MACHO INVESTING?

Dangerous Don:   BE DANGEROUS!

Johnny:  Meaning?

Dangerous Don:   Take risks!   Never pass up a chance to do something dangerous.   Sky-diving.  Bungee-jumping.   Investing.  It's all the same.

Johnny:  Totally crazy.

Dangerous Don:  Remember what all the finance books say.  RISK EQUALS REWARD.   So, obviously, THE MORE RISK, THE MORE REWARD.

Johnny:  Complete looney-tunes.  

Dangerous Don:  Love to talk about it more, but we're outta time.   Okay. . . . so, folks, we’ll see you next time.  Stay tuned to the MACHO INVESTING blog.  You’re going to make a TON of money!   So long!