Trump’s 401(k) Crypto and Private Equity Changes: What Investors Should Know
Summary
401(k) Changes: The podcast discusses President Trump's executive order to potentially allow 401(k) investments in private equity and cryptocurrency, highlighting the complexities and regulatory challenges involved.
Investment Options: While more investment choices in retirement accounts can be beneficial, they also pose risks due to the lack of investor knowledge and the speculative nature of assets like crypto.
Private Equity Concerns: Private equity is critiqued for its high fees and questionable return metrics, such as the Internal Rate of Return (IRR), which may not accurately reflect true performance.
Crypto Warnings: Investors are cautioned against over-allocating to cryptocurrency due to its volatility and speculative nature, with a recommendation to limit exposure to 5-10% of a portfolio.
Investment Strategy: Whitney Tilson shares his investment strategy, emphasizing the importance of steady income, living below means, maximizing retirement contributions, and investing in low-cost index funds.
Portfolio Diversification: Tilson suggests diversifying away from concentrated positions in large-cap US stocks by incorporating equal-weighted and international index funds to mitigate risks associated with overconcentration.
Regulatory Perspective: The podcast discusses the role of government regulation in protecting investors from high-risk and illiquid investments, advocating for a strong regulatory environment to prevent financial missteps.
Transcript
I know everyone wants a wealthy retirement and we all want to know how to get there. But is the answer private equity or is it crypto? Well, there are big changes happening designed to get your retirement dollars into these asset classes and more. So, should you upend your retirement plan? That's the question and I'm going to tell you in the next few minutes. So, stick with me for a second. I'll show you the changes Trump's making to 401ks, exactly how that'll work, and also I'll answer the question on so many investors minds. Should I be putting my retirement dollars into private equity and into cryptocurrency? So, here's where we start. You always hear statistics about how little the average American has saved for retirement. The average US household has less than $87,000 in retirement savings. And that is not good. And for most people, their main retirement asset is their 401k. And while the average person doesn't have much, as a collective, Americans have amassed $12 trillion into their retirement account. And just for comparison, the total US stock market stands at about $60 trillion. So, Wall Street has been eyeballing that cash pile for decades, and they're making a big move to try and add it to their assets under management. So over the last few weeks, the government has started the process to open your 401k to private equity and cryptocurrency. On August 7th, President Trump signed an executive order directing the Department of Labor to revisit the rules on alternative investments in retirement plans like 401ks and 403bs. And specifically, he mentioned private equity, crypto, and real estate. Now, many outlets are reporting this as Trump opening up 401ks to private equity and crypto. That's not exactly right. This is a long and complicated process. The regulations around retirement accounts are draconian and often ridiculous. But I can explain it in a few lines. And if you've got a 401k, you need to know how this works. If you want a great fast lesson on investing your 401k, I'm going to bring on a Wall Street legend in a moment to see what he's doing with his own money. and we've also distilled his insights into a short simple report that you can get by clicking the link in the description below. Now, here's how a 401k works. If you have a 401k with your employer, your menu of investment choices is governed by a trustee. The trustee has a fiduciary duty to do what is in the best interest of the individual investor. And if they don't act in the best interest of the ini individual uh they can get into big legal trouble. So this includes not letting investors purchase bad investments. But in the rules there there are few specifics. They they need to select investments prudently. That's about all it says. And over the decades this has been interpreted as being very prudent indeed. Trustees take very little risk on what investments they allow. So, for a long time, plans only offered a small handful of basic mutual funds. And in recent years, it's opened up and now includes an average of about 20 funds in your standard 401k, but it's still a small and conservative list. No one wants to get sued because retirees lost money. So, now Trump has ordered Orisa, which regulates 401ks, to review the rules and provide more guidance. and it's expected that they'll relieve the pressure on trustees to tilt towards extreme safety uh and open up more options. So, is this a good thing for you? Well, there are two sides to that question. So, in general, more options are better, right? I I've never liked the thought of government restricting the investment choices of independent adults. But at the same time, your 401k comes with a high degree of financial danger. And let's be honest, almost nobody knows what they are doing. It's not that hard to learn to invest your 401k with some basic knowledge. But most people have busy lives and they don't have the time or interest to figure out. In fact, according to a survey, 46% of workers with a retirement account have no idea what it's even invested in. So, I like to say that investment choices are like power tools. I think they should be sold freely at the hardware store, but you do need some training if you think you're going to go out and build your own deck. So, a wider range of options in general would be great for some investors and confusing and dangerous for others. But let's actually look at the specifics of crypto and private equity because in this case, I'm warning investors to stay away and I will tell you exactly why. So, crypto kind of gets the gentler warning. So, let's start with that one. And it's as simple as this. Don't get carried away. As incredible as crypto returns have been during certain periods, this is the exact kind of investment that draws novice investors in and wipes them out. Now, I love crypto. I own it. I've mined it. It's becoming more accepted as a part of mainstream finance as a store of value. And I definitely believe you should own some. But you have to know it can absolutely go to zero. And I know I just know there are investors out there that will put 20% 50% or even 100% of their retirement funds into crypto. And that is insane. You shouldn't even have 100% of your retirement account in stocks. Never mind something as speculative as crypto. So you need a collection of assets to balance your risk. In my view, you want my take at most crypto should be five, maybe 10% of someone's account if they are an informed and educated crypto bull. So please just tread carefully if these get allowed in your 401k accounts. Private equity is another matter. Uh Wall Street has initiated this push to open up 401ks. They want to manage as much of that $12 trillion as they can. And the private equity industry as a whole is something like $5 trillion under management. So this is a big opportunity for them. And private equity will say that it provides higher returns with less risk than public stock. And they'll also say that the long-term time frame of retirement investors perfectly suits the long holding periods of private equity. Well, how nice of them to try and help everyday investors get better returns. But of course, the truth that we know is they want to manage your money for fees, and they're going to be high fees. And all of those proof points they have about private equity, they're all a little shaky. So, let's take them point by point. Uh, private equity claims higher returns, but the measure that they use is different from the stock market. They quote private equity fund returns as what's called an internal rate of return or an IRR. And academics and skeptics have questioned whether that's a fair measure and they claim it inflates PE returns. So returns may not actually be as good as they look. Uh, and also as the PE industry has grown larger, it's attracted more capital and competition has gotten more intense. So in recent years, the returns on private equity have eroded. So the attractive historical returns of PE may not continue into the future. Private equity also claims lower risks, but that's because their investments don't trade in public markets. So they often get to make up their own prices. So they point out that the prices aren't volatile, but that's nonsense. The value of the investments they hold in reality fluctuates just like those of the stock market. You just can't see it in a quoted price. So, quantitative hedge fund billionaire Cliff Asenes calls this volatility laundering. Uh, and third, private equity does make long-term investments, but they're also illquid. They can't buy and sell them quickly. They hold them for years, and they only occasionally make big exits when they can sell an entire company. And no one knows just yet how private equity can take these illquid investments and put them into funds that individual investors can put in their 401k. Wall Street will figure it out. I'm sure of that. But I also know it'll take a lot of financial engineering and the end result will be complex in a business where simplicity is actually what's best. So you can't know whether PE makes sense in your 401k until we see how the product is actually packaged. And I am skeptical already because private equity investments will come with significantly higher fees than index funds. Look, the whole private equity industry thrives on fees. The typical fund charges 2% of assets and then more on your returns, more like a hedge fund. And they also charge management fees that they take out of the profits of the companies they own. And you can be sure they're not going to cut a good deal for mom and pop investors. So, private equity in your 401k sounds intriguing, but it's not happening out of the goodness of Wall Street or Trump's heart. It's happening because they want to generate monster fees on trillions of retirement dollars. So, keep it simple, keep your fees low, and tread carefully whenever Wall Street wants to offer you a great new investment. They've always thought about their own angle first. Now, to talk to this today, I wanted to bring in my colleague Whitney Tilson. Whitney is a former hedge fund manager. He's the editor of Stanbury Investment Advisory, and he personally knows just about every big name on Wall Street. Uh Whitney recently wrote an essay detailing to his describers exactly how he's allocating his own long-term investment capital right now and has gotten wonderful feedback from our subscribers. So, I wanted to talk about that. Whitney, first on the topic at hand, crypto, private equity, are you clamoring to get these into your retirement account? >> Absolutely not. I My views echo yours. Uh, I've always been in Charlie Munger and Warren Buffett's uh, camp on crypto. I think uh, Charlie Munger called it rat poison squared. Um, it's an instrument of speculation and really there's been no credible use case beyond that. So, it's been an incredible speculation and you know I look back on it a little bit and think, you know, maybe I should have put 1% of my assets into something. It's turned out to be one of the best speculations of all time, but uh I don't really have too many regrets about missing that and I certainly don't recommend piling in at all-time highs, which is where we are today with, you know, basically close to it at Bitcoin and Ethereum. Um, regarding private equity, this has been a this is a real asset class. They're investing in real businesses. Uh, so I wouldn't characterize this speculation. um the private uh investing in private companies falls into two buckets. You have your venture capital industry and your private equity industry. Venture capital just tends to be earlier stage um riskier investments, you know, where you might make, you know, 10 to 100 times your money. Generally, you're not using debt. Private equity is investing often taking uh mature companies. um sometimes involves taking public companies private, but generally it's private mature businesses where they're looking for an exit but aren't yet ready to go public or don't want to go public and they sell themselves. So these are uh to a private equity firm that is typically using uh uh u you know uh $5 of debt, let's say, or sometimes during speculative times $10 of debt for every $1 the private equity firm puts in. So, they're taking a business that's generally uh almost always cash flow positive. They're um and they're using that cash flow to pay down debt and they're cutting costs and uh sometimes it involves big cost cutting, sometimes acquisitions. But here we're talking later stage businesses and good private equity firms don't want to ever lose money. Whereas venture capital, it's expected that you're going to lose all your money half the time, if not 80% of the time, but you get 100 to one payoffs on the ones that do pay off. So, it's private equity that is what we're talking about getting put into uh you know publicly traded mutual funds and things that are available to average folks. Um I don't think it's the worst idea I've ever heard, but generally I would advise the average person to stay away from it. Um again, things are trading at all-time high valuations. These things are illquid. They're hard to value. And uh as you said, this is just another way for Wall Street to get its hands on big fees, um opaque investments, and get rid of investments that they may be having trouble taking public, for example, and instead, you know, sticking them on average Americans. Um so you don't want to be one of those people. >> Yeah, that's a good point, Whitney. um you know private equity has there are some ways you can say it's it's had better returns but they do it with leverage and they do it with uh illlquid investments. So when you kind of adjust for those risks it really is not as attractive as as they make it out to be. Um >> yeah I mean if you take the I've seen um um analyses of private equity and their numbers are very iffy about you know what the real returns are. You know, this IRRa can be calculated a lot of different ways, but basically if you just put your money in the S&P 500 and lever it up 5 to1 over the past 20, 30 years, you do a lot better than private equity. So, uh there there they may actually it may maybe I believe that private equity overall has outperformed the S&P 500, but not when you adjust for the 5x leverage. >> Yeah. And there's a big gap between good private equity firms and the and sort of the rest of the pack. And I don't know which ones, you know, the people at home are going to be able to get into either, right? So, uh, >> that's true of venture capital as well. Um, the the the handful of top firms which are generally not open. They're generally not taking in money from the mutual funds of the world, which is what our our listeners would mostly be getting exposure to. Um, you know, those those it's so it's going to be the second tier stuff that gets um that gets into mutual funds. And again, the returns there are even worse. And and Whitney, you're a guy, I think, who thinks a lot about policy and like how the system should work. Um, so how do you feel about more choices for investors in their 401ks? I I kind of put out both sides. You know, choice is good, but it but it can be dangerous. Do you have an opinion on how to best serve retirement savers? Yeah, I guess my view on this um the analogy I would give is whether you believe that a law requiring people to riding motorcycles to wear a helmet is a good idea. And I completely understand the point of view of people saying look if somebody wants to go out and ride a motorcycle without a helmet because they like the wind flowing through their hair or whatever that's their business even though it's a crazy and dangerous thing to do. Um I tend to be on the side of good government should try and protect its citizens from themselves and uh so I would tend to favor um uh uh motorcycle helmet rules. So similarly when it comes to what should government's role be in trying to protect people from themselves uh when it comes to the investing world um you know the history of humanity going back thousands of years show that human beings are extremely irrational when it comes to money are prone to every type of get-richqu scheme Ponzi schemes etc. I'm generally in favor of quite a strong regulatory environment and uh and limiting the riskiest most illquid investments uh to uh you know accredited investors and u in some capacity and what and that's typically been the case. you have to have a million dollars of net worth or $250,000 of annual income to be a accredited investor to invest in um private equity funds, venture capital funds, for example. Uh generally speaking, you know, when I ran a hedge fund, it was sometimes a little frustrating that I had someone who wanted to invest with me, but they weren't accredited investor, so I couldn't take their money. Uh why shouldn't two rational, you know, educated people be able to do that business transaction, right? Uh but on the other hand from a public policy perspective uh I think it's um it's generally good. We've seen what happens when you deregulate and it's the wild west. You end up with you know what China is today or something where people just getting scammed right left and center by every kind of charlatan and all. So um so I uh I'm I think it's bad public policy to allow illquid investments. Um, it's also just bad financial. It doesn't make sense given that by law, for example, mutual funds have to give their investors daily liquidity to invest in an instrument that doesn't have daily liquidity. Now, you have a liquidity mismatch. And what happens if a mutual fund loads up on 50% private equity, uh, that there's only liquidity, I don't know, once a year quarterly, and then a bunch of investors decide to redeem from that fund. Um, you know, I've seen that happen with hedge funds which have a lot more leeway here and hedge funds uh have literally been forced to shut down, have put up what are called gates so that you don't have the liquidity that you think you have. Um so for for purely financial liquidity mismatch reasons I don't think any um certainly a vehicle available to the public where by law they give daily liquidity should be allowed to invest in anything that doesn't have something close to daily liquidity. Like there are certain stocks where you know a mutual fund might build up a position in a small company um that the position is more than the average daily trading volume of the stock. you know, if you get too much of your fund in illquid micro cap stocks, you know, there might be a little bit of a problem. But with private equity, there's no liquidity at all in the short term. >> Yeah. And I've looked at some of the the models for how they might do this. And they involve all this trunching and all these complicated ways to to make a liquid fund without with these illquid investments. And you know whenever you see complexity like that you just think what are the what are those edge cases those weird things that happen that make these things >> and by the way the and the other element of this in addition to liquidity is how do you value these things so again mutual funds every day it's very easy when you have mutual fund full of stocks um anyone entering the mutual fund is buying in at the stocks at that day's closing price um in a in a publicly traded stock. So that's the valuation. Now you may think that that valuation is wrong but that is the valuation that the market has assigned. Whereas private equity the people who made the investment are the ones who market. Well talk about a conflict of interest. You know who how many people you raise their hand and be like oh yeah this investment turned into a real stinker and it's probably only worth half what I paid for it. Um you know that that doesn't happen very often. So these private equity guys um you know they call they say it's they there's no market so they say it's mark to model. Well what model? Whose model? Um I call it mark to myth. Uh so um you have all sorts of room for um things that will favor either exiting investors or entering investors and disfavor the other group um in a way that I believe represents impossible impossible conflicts of interest. And even if there were no conflicts of interest, who the heck knows what a private business is worth. >> Yeah. >> If there's no liquid market for its securities, >> and if they're taking a percentage of assets, that's their fee. The higher they make that mark, the more fees they actually get. So they I mean, it's >> And if you actually look at the marks of these, you know, the average stock, you know, depending on tariffs, interest rates, whatever, and the average year fluctuates by 50% in value. these private equity guys just hold everything at the same price as if you know it's worth the same and it's not. Uh so you know one of the one of the reasons you know big institutions like to invest a lot of money in private equity is actually because it's not as volatile as their stock portfolio. Well actually it's more volatile because you have an illquid private company. Um but but they get the comfort of the private equity managers telling them that it's all smooth and hey the stock market was down 20% in April but you know your private equity portfolio didn't fluctuate in value at all. I was like nah that's just a big lie. >> Yeah it doesn't work that way. Um okay so Whitney you've got a a credible knack for simplifying and distilling financial complex rather uh concepts rather than make them complex. You make investing simple. So, just real quickly, would you tell us your four rules for a wealthy retirement? >> Um, well, sure. Um, and by the way, um, you know, I'm a stock picker. We are, we at Stanbury Research here are in the business of, you know, finding winning stocks, but that actually comes is probably the least important piece of it to uh, build long-term wealth. Uh, the first and foremost is is you need a steady income. Uh I see so many people um including people in my family right now who've been laid off from work who are out there you know looking at becoming urbal life franchisees or getting sucked into uh you know the the the business some business opportunity. Um and for the vast vast vast majority of people um uh having a steady job building a career where you get promoted over time uh where you have you know provides you with uh reasonable health care benefits for you and your family etc. But number one um you know make focus on your career and developing really valuable skills that aren't going to get knocked out by AI or foreign competition or whatever. Um so ideally in the professional world build a career so uh income a steady income you know my parents are both teachers over their lives they met and married in the peace corps they've never either of them has ever had substantial income even you know what I earned first year out of business school 30 years ago neither have ever earned that but they have a very comfortable retirement uh because both of them have always worked so two people two incomes every single year for 50 years um uh you know growing enough at least to you know keep up with inflation. It would be number one. Then number two is live beneath your means and that is again uh my parents are teachers uh but boy they can uh they never had high income but we squeezed every dollar to this day. My mom clipped coupons and would every time she went to the supermarket she would come home cackling about how much she saved with her you know fist full of coupons. Um we never uh owned you uh new cars for example. Uh so uh you know it's so so easy particularly in today's world where on your phone they're just every you can with a swipe you can buy anything in the world you want on Amazon and have it at your doorstep the next day etc. Um all these products uh buy now pay later on CLA uh and a firm um this is just all forms of debt. Uh there's all sorts of there's there's the only real really good type of debt is a fixed rate 30-year mortgage ideally locked in a few years ago at a low rate like 3%. Um that's the greatest uh form of debt ever. Uh government subsidized you know fixed rate debt where you have the option to refinance lower but if interest rates go up as they have in recent years you're still you've still got 3% mortgage but other than that credit card debt is absolutely deadly. uh um uh buy now pay later all and just the ease of buying things. Forget debt. Just it's e so easy to overspend to have subscriptions to Netflix and Disney Plus and all these little monthly payments add up. Just look at your credit card statement. I think you'd be shocked at how much all these monthly payments add up. Um so, uh whatever your income is, live beneath it such that every single year you are a net saver. So that means uh that leads me to step number three, which is take your savings and max out to the extent possible on your retirement accounts, especially if your employer matches you. Uh that's free money. And so, you know, often, um that's another good reason to have a job is you might have an employer that supplements you with, you know, a few thousand dollar a year. I think the the latest I've seen is um any American can put aside $23,000 a year into a tax deferred account and that can compound now until age 59 and a half uh is when you can start withdrawing money without paying the 10% penalty. But you don't have to start withdrawing at that age. You can keep it compounding um and make the miracle the magic of compounding work for you. And in an ideal world, that money comes out of your paycheck such that it never even hits your bank account. Uh and so that would be step three. And then this fourth step is um invest the money in the stock market. Now, this is where uh Matt I wrote recently about some changes I've made. But the default option I've been using for decades for each of my three daughters now in their 20s entering the working world for my sister, my parents, is have the money go into your the money that's withdrawn from your paycheck goes directly into a retirement account in a Vanguard or Fidelity or something like that and then is automatically invested into the S&P 500 uh index fund. Super low cost. Um and the S&P 500 index has outperformed you know depending on what time period you look at you know 80 plus% of actively managed funds and um and that has resulted in uh very very nice nest eggs for you know my sister my parents starting to build for my daughters um the S&P 500 has been a has been a fabulous investment but the key is is don't look at it don't get freaked out by you know the stocks market falls 20% in April um and you get scared out at the bottom, you know, maybe look at it once a year because effectively what you're doing is you're dollar cost averaging over a long period of time into 500 big US companies basically into the US economy, US stock market and um and but the key is is don't try and time it or do anything. Have it just be and automatically set up. That's sort of the base advice. Um, and then, you know, if you want, uh, I can sort of talk about how I've sort of tweaked that advice just in the past week in my own account. >> Yeah, I was going to say, you know, get rich slowly is the is the the proper way to do it. Um, but like you said, you made a big change. U, I personally think this is exactly the right move to make. So, why don't you tell us uh, you know, the new look of your of your equity portfolio? >> Yeah. Well, it hasn't really changed that much, but basically, um, you know, I'm I'm in the stock picking business. So, I think with a portion of my money, I can try and do better with the market, but, um, uh, because I, uh, uh, we at Stanbury Research have a policy of we can't trade in any of the stocks were, uh, recommending to our subscribers because we don't want that conflict of interest. We always put our subscribers first. Um, so that greatly limits the stocks I'd like to buy because they're the ones I'm recommending and giving to my readers and subscribers. Uh, so my uh long-term savings are about 50% S&P 500, just SPY, the primary ETF for the S&P 500. Um, and then 50% a handful of obscure stocks that don't fit in our portfolios. I've invested in my cousin's private medical device company. You know, uh some a little a few private investments, but not much. Um you know, it's mostly a handful of liquid stocks um that just aren't a fit for Stanbury uh any of our publications. But um of the half that's in the S&P 500 um I've seen data recently that makes me concerned that um it is overweighted in a handful of stocks in a way that historically has meant it's probably a good time to diversify a bit. So by that I mean the spy the 99% of S&P 500 index funds are market cap weighted and what that means is is that the of the 500 stocks in the S&P 500 the most valuable stock is Nvidia call it $4 trillion. The least valuable stock the last I looked last week was Nphase Energy which was $4 billion. In other words, the waiting of Nvidia is 1,000 times as much as the waiting of the 500 stock in the S&P 500. So effectively if you add it up by market cap which is how the index performs the top 10 stocks. So we'd be talking you know mo mostly the magnificent 7 throw in Bergkshire Hathaway JP Morgan Chase Visa and Mastercard but it's mostly you know Tesla uh Google Amazon Alphabet um Meta Platforms. Alphabet and Google are the same company of course you know that's your top 10. those 10 stocks account for depending on the day call it almost 40% of the entire value of the S&P 500. So I just became concerned that you know half of my long-term retirement savings of that half 40% of it's just in 10 stocks now but that's a market that's that's that's what everyone's stuck in. So how do you fix that with without getting too complicated? Well, the way um I decided to fix it, the other piece of this is that the US stock market has performed dramatically better than uh international stocks in general and such that if I recall correctly, um these numbers aren't exact, but the US economy accounts for 23% of the world's GDP, but US stocks account for 75% of the world's GDP. Um, and there are good reasons for that. The US has the most dynamic uh, companies. We have the best stock markets with good investor protections, etc., etc. But boy, that's an awfully big difference, right? Um, and if you look at the ratio of the S&P 500 to an international index, um, that's diverged dramatically. So, I sort of thought to myself, you know, having some exposure to international stocks, um, might be a good idea as well. So, the two changes I made, I decided to instead of um having my portfolio, the 50% that's just indexed, instead of having all of it in the S&P 500 market cap weighted, I instead um shifted half of it to um um equal weighted such that N-Phase Energy and Nvidia are the a move in each of those stocks affects that the index fund equally. So there there are a handful of ETFs and mutual funds that are S&P 500. So it's the same 500 stocks um but it just weights them um not based on their market cap but just based on each stock is worth 1500th of the index. The ticker of one of them is RSP um which is a uh which is a lowc cost. It's probably the largest equal weighted fund. Um and then I looked for a good international a low fee. Again, I'm sticking with index funds here. This is the indexed part of my portfolio. Um, and there are a couple Vanguard funds. Uh, the one I decided to pick, but there are a couple, is VXUS. Um, and basically it's a it's 5,000 uh global stocks, but none in the US, hence XUS. Um, so it's um uh it's very diversified. It owns lots of smaller stocks as well, not just big caps internationally. And so instead of 100% I have 40 4020. So I have 40% SPY, 40% RRSP and VXUS for the balance of 20%. The one last point I want to make is is I made these changes in my retirement accounts. So I had big gains because I've owned SPY for a number of years and it's gone up, you know, two, three times from what I paid. Um, if I were to sell, if I were uh to execute this strategy in a taxable account, I would owe big capital gains on the SPY that I sold down, 60% of my SPY that I sold. So, I would not recommend um making the shift. I don't feel strongly enough about this change that I would be willing to pay big capital gains to affect this change. Um but in uh in a retirement account uh I don't think it'll make a massive difference over time. But you know my hope is is that it'll perform a little better if these uh mega if the US stock market doesn't perform quite as well as internationally. If smaller cap stocks after many years of outperformance um you know start to do a little better than the mega cap stocks, maybe I squeeze an extra point or two uh of return um out of out of my portfolio by making this shift. >> Yes. So if you own an index fund like spy has gotten extremely concentrated. If that worries you, you can move some money into things like RSP, which is an equal weighted fund, or uh VXUS, which is an international stock fund, and they're going to protect you a little bit from that overconentration in those huge US tech stocks. Whitney, I think that's great. Um, thank you so much for sharing. If you found that useful, if you want to get it in writing, we have a simple, easy report. We've put it all together for you. Just click the link in the description below. We'll get you that information. Uh, as usual, uh, like and subscribe here on YouTube so you never miss an update. We'll be off next week, but I'll be back after that.
Trump’s 401(k) Crypto and Private Equity Changes: What Investors Should Know
Summary
Transcript
I know everyone wants a wealthy retirement and we all want to know how to get there. But is the answer private equity or is it crypto? Well, there are big changes happening designed to get your retirement dollars into these asset classes and more. So, should you upend your retirement plan? That's the question and I'm going to tell you in the next few minutes. So, stick with me for a second. I'll show you the changes Trump's making to 401ks, exactly how that'll work, and also I'll answer the question on so many investors minds. Should I be putting my retirement dollars into private equity and into cryptocurrency? So, here's where we start. You always hear statistics about how little the average American has saved for retirement. The average US household has less than $87,000 in retirement savings. And that is not good. And for most people, their main retirement asset is their 401k. And while the average person doesn't have much, as a collective, Americans have amassed $12 trillion into their retirement account. And just for comparison, the total US stock market stands at about $60 trillion. So, Wall Street has been eyeballing that cash pile for decades, and they're making a big move to try and add it to their assets under management. So over the last few weeks, the government has started the process to open your 401k to private equity and cryptocurrency. On August 7th, President Trump signed an executive order directing the Department of Labor to revisit the rules on alternative investments in retirement plans like 401ks and 403bs. And specifically, he mentioned private equity, crypto, and real estate. Now, many outlets are reporting this as Trump opening up 401ks to private equity and crypto. That's not exactly right. This is a long and complicated process. The regulations around retirement accounts are draconian and often ridiculous. But I can explain it in a few lines. And if you've got a 401k, you need to know how this works. If you want a great fast lesson on investing your 401k, I'm going to bring on a Wall Street legend in a moment to see what he's doing with his own money. and we've also distilled his insights into a short simple report that you can get by clicking the link in the description below. Now, here's how a 401k works. If you have a 401k with your employer, your menu of investment choices is governed by a trustee. The trustee has a fiduciary duty to do what is in the best interest of the individual investor. And if they don't act in the best interest of the ini individual uh they can get into big legal trouble. So this includes not letting investors purchase bad investments. But in the rules there there are few specifics. They they need to select investments prudently. That's about all it says. And over the decades this has been interpreted as being very prudent indeed. Trustees take very little risk on what investments they allow. So, for a long time, plans only offered a small handful of basic mutual funds. And in recent years, it's opened up and now includes an average of about 20 funds in your standard 401k, but it's still a small and conservative list. No one wants to get sued because retirees lost money. So, now Trump has ordered Orisa, which regulates 401ks, to review the rules and provide more guidance. and it's expected that they'll relieve the pressure on trustees to tilt towards extreme safety uh and open up more options. So, is this a good thing for you? Well, there are two sides to that question. So, in general, more options are better, right? I I've never liked the thought of government restricting the investment choices of independent adults. But at the same time, your 401k comes with a high degree of financial danger. And let's be honest, almost nobody knows what they are doing. It's not that hard to learn to invest your 401k with some basic knowledge. But most people have busy lives and they don't have the time or interest to figure out. In fact, according to a survey, 46% of workers with a retirement account have no idea what it's even invested in. So, I like to say that investment choices are like power tools. I think they should be sold freely at the hardware store, but you do need some training if you think you're going to go out and build your own deck. So, a wider range of options in general would be great for some investors and confusing and dangerous for others. But let's actually look at the specifics of crypto and private equity because in this case, I'm warning investors to stay away and I will tell you exactly why. So, crypto kind of gets the gentler warning. So, let's start with that one. And it's as simple as this. Don't get carried away. As incredible as crypto returns have been during certain periods, this is the exact kind of investment that draws novice investors in and wipes them out. Now, I love crypto. I own it. I've mined it. It's becoming more accepted as a part of mainstream finance as a store of value. And I definitely believe you should own some. But you have to know it can absolutely go to zero. And I know I just know there are investors out there that will put 20% 50% or even 100% of their retirement funds into crypto. And that is insane. You shouldn't even have 100% of your retirement account in stocks. Never mind something as speculative as crypto. So you need a collection of assets to balance your risk. In my view, you want my take at most crypto should be five, maybe 10% of someone's account if they are an informed and educated crypto bull. So please just tread carefully if these get allowed in your 401k accounts. Private equity is another matter. Uh Wall Street has initiated this push to open up 401ks. They want to manage as much of that $12 trillion as they can. And the private equity industry as a whole is something like $5 trillion under management. So this is a big opportunity for them. And private equity will say that it provides higher returns with less risk than public stock. And they'll also say that the long-term time frame of retirement investors perfectly suits the long holding periods of private equity. Well, how nice of them to try and help everyday investors get better returns. But of course, the truth that we know is they want to manage your money for fees, and they're going to be high fees. And all of those proof points they have about private equity, they're all a little shaky. So, let's take them point by point. Uh, private equity claims higher returns, but the measure that they use is different from the stock market. They quote private equity fund returns as what's called an internal rate of return or an IRR. And academics and skeptics have questioned whether that's a fair measure and they claim it inflates PE returns. So returns may not actually be as good as they look. Uh, and also as the PE industry has grown larger, it's attracted more capital and competition has gotten more intense. So in recent years, the returns on private equity have eroded. So the attractive historical returns of PE may not continue into the future. Private equity also claims lower risks, but that's because their investments don't trade in public markets. So they often get to make up their own prices. So they point out that the prices aren't volatile, but that's nonsense. The value of the investments they hold in reality fluctuates just like those of the stock market. You just can't see it in a quoted price. So, quantitative hedge fund billionaire Cliff Asenes calls this volatility laundering. Uh, and third, private equity does make long-term investments, but they're also illquid. They can't buy and sell them quickly. They hold them for years, and they only occasionally make big exits when they can sell an entire company. And no one knows just yet how private equity can take these illquid investments and put them into funds that individual investors can put in their 401k. Wall Street will figure it out. I'm sure of that. But I also know it'll take a lot of financial engineering and the end result will be complex in a business where simplicity is actually what's best. So you can't know whether PE makes sense in your 401k until we see how the product is actually packaged. And I am skeptical already because private equity investments will come with significantly higher fees than index funds. Look, the whole private equity industry thrives on fees. The typical fund charges 2% of assets and then more on your returns, more like a hedge fund. And they also charge management fees that they take out of the profits of the companies they own. And you can be sure they're not going to cut a good deal for mom and pop investors. So, private equity in your 401k sounds intriguing, but it's not happening out of the goodness of Wall Street or Trump's heart. It's happening because they want to generate monster fees on trillions of retirement dollars. So, keep it simple, keep your fees low, and tread carefully whenever Wall Street wants to offer you a great new investment. They've always thought about their own angle first. Now, to talk to this today, I wanted to bring in my colleague Whitney Tilson. Whitney is a former hedge fund manager. He's the editor of Stanbury Investment Advisory, and he personally knows just about every big name on Wall Street. Uh Whitney recently wrote an essay detailing to his describers exactly how he's allocating his own long-term investment capital right now and has gotten wonderful feedback from our subscribers. So, I wanted to talk about that. Whitney, first on the topic at hand, crypto, private equity, are you clamoring to get these into your retirement account? >> Absolutely not. I My views echo yours. Uh, I've always been in Charlie Munger and Warren Buffett's uh, camp on crypto. I think uh, Charlie Munger called it rat poison squared. Um, it's an instrument of speculation and really there's been no credible use case beyond that. So, it's been an incredible speculation and you know I look back on it a little bit and think, you know, maybe I should have put 1% of my assets into something. It's turned out to be one of the best speculations of all time, but uh I don't really have too many regrets about missing that and I certainly don't recommend piling in at all-time highs, which is where we are today with, you know, basically close to it at Bitcoin and Ethereum. Um, regarding private equity, this has been a this is a real asset class. They're investing in real businesses. Uh, so I wouldn't characterize this speculation. um the private uh investing in private companies falls into two buckets. You have your venture capital industry and your private equity industry. Venture capital just tends to be earlier stage um riskier investments, you know, where you might make, you know, 10 to 100 times your money. Generally, you're not using debt. Private equity is investing often taking uh mature companies. um sometimes involves taking public companies private, but generally it's private mature businesses where they're looking for an exit but aren't yet ready to go public or don't want to go public and they sell themselves. So these are uh to a private equity firm that is typically using uh uh u you know uh $5 of debt, let's say, or sometimes during speculative times $10 of debt for every $1 the private equity firm puts in. So, they're taking a business that's generally uh almost always cash flow positive. They're um and they're using that cash flow to pay down debt and they're cutting costs and uh sometimes it involves big cost cutting, sometimes acquisitions. But here we're talking later stage businesses and good private equity firms don't want to ever lose money. Whereas venture capital, it's expected that you're going to lose all your money half the time, if not 80% of the time, but you get 100 to one payoffs on the ones that do pay off. So, it's private equity that is what we're talking about getting put into uh you know publicly traded mutual funds and things that are available to average folks. Um I don't think it's the worst idea I've ever heard, but generally I would advise the average person to stay away from it. Um again, things are trading at all-time high valuations. These things are illquid. They're hard to value. And uh as you said, this is just another way for Wall Street to get its hands on big fees, um opaque investments, and get rid of investments that they may be having trouble taking public, for example, and instead, you know, sticking them on average Americans. Um so you don't want to be one of those people. >> Yeah, that's a good point, Whitney. um you know private equity has there are some ways you can say it's it's had better returns but they do it with leverage and they do it with uh illlquid investments. So when you kind of adjust for those risks it really is not as attractive as as they make it out to be. Um >> yeah I mean if you take the I've seen um um analyses of private equity and their numbers are very iffy about you know what the real returns are. You know, this IRRa can be calculated a lot of different ways, but basically if you just put your money in the S&P 500 and lever it up 5 to1 over the past 20, 30 years, you do a lot better than private equity. So, uh there there they may actually it may maybe I believe that private equity overall has outperformed the S&P 500, but not when you adjust for the 5x leverage. >> Yeah. And there's a big gap between good private equity firms and the and sort of the rest of the pack. And I don't know which ones, you know, the people at home are going to be able to get into either, right? So, uh, >> that's true of venture capital as well. Um, the the the handful of top firms which are generally not open. They're generally not taking in money from the mutual funds of the world, which is what our our listeners would mostly be getting exposure to. Um, you know, those those it's so it's going to be the second tier stuff that gets um that gets into mutual funds. And again, the returns there are even worse. And and Whitney, you're a guy, I think, who thinks a lot about policy and like how the system should work. Um, so how do you feel about more choices for investors in their 401ks? I I kind of put out both sides. You know, choice is good, but it but it can be dangerous. Do you have an opinion on how to best serve retirement savers? Yeah, I guess my view on this um the analogy I would give is whether you believe that a law requiring people to riding motorcycles to wear a helmet is a good idea. And I completely understand the point of view of people saying look if somebody wants to go out and ride a motorcycle without a helmet because they like the wind flowing through their hair or whatever that's their business even though it's a crazy and dangerous thing to do. Um I tend to be on the side of good government should try and protect its citizens from themselves and uh so I would tend to favor um uh uh motorcycle helmet rules. So similarly when it comes to what should government's role be in trying to protect people from themselves uh when it comes to the investing world um you know the history of humanity going back thousands of years show that human beings are extremely irrational when it comes to money are prone to every type of get-richqu scheme Ponzi schemes etc. I'm generally in favor of quite a strong regulatory environment and uh and limiting the riskiest most illquid investments uh to uh you know accredited investors and u in some capacity and what and that's typically been the case. you have to have a million dollars of net worth or $250,000 of annual income to be a accredited investor to invest in um private equity funds, venture capital funds, for example. Uh generally speaking, you know, when I ran a hedge fund, it was sometimes a little frustrating that I had someone who wanted to invest with me, but they weren't accredited investor, so I couldn't take their money. Uh why shouldn't two rational, you know, educated people be able to do that business transaction, right? Uh but on the other hand from a public policy perspective uh I think it's um it's generally good. We've seen what happens when you deregulate and it's the wild west. You end up with you know what China is today or something where people just getting scammed right left and center by every kind of charlatan and all. So um so I uh I'm I think it's bad public policy to allow illquid investments. Um, it's also just bad financial. It doesn't make sense given that by law, for example, mutual funds have to give their investors daily liquidity to invest in an instrument that doesn't have daily liquidity. Now, you have a liquidity mismatch. And what happens if a mutual fund loads up on 50% private equity, uh, that there's only liquidity, I don't know, once a year quarterly, and then a bunch of investors decide to redeem from that fund. Um, you know, I've seen that happen with hedge funds which have a lot more leeway here and hedge funds uh have literally been forced to shut down, have put up what are called gates so that you don't have the liquidity that you think you have. Um so for for purely financial liquidity mismatch reasons I don't think any um certainly a vehicle available to the public where by law they give daily liquidity should be allowed to invest in anything that doesn't have something close to daily liquidity. Like there are certain stocks where you know a mutual fund might build up a position in a small company um that the position is more than the average daily trading volume of the stock. you know, if you get too much of your fund in illquid micro cap stocks, you know, there might be a little bit of a problem. But with private equity, there's no liquidity at all in the short term. >> Yeah. And I've looked at some of the the models for how they might do this. And they involve all this trunching and all these complicated ways to to make a liquid fund without with these illquid investments. And you know whenever you see complexity like that you just think what are the what are those edge cases those weird things that happen that make these things >> and by the way the and the other element of this in addition to liquidity is how do you value these things so again mutual funds every day it's very easy when you have mutual fund full of stocks um anyone entering the mutual fund is buying in at the stocks at that day's closing price um in a in a publicly traded stock. So that's the valuation. Now you may think that that valuation is wrong but that is the valuation that the market has assigned. Whereas private equity the people who made the investment are the ones who market. Well talk about a conflict of interest. You know who how many people you raise their hand and be like oh yeah this investment turned into a real stinker and it's probably only worth half what I paid for it. Um you know that that doesn't happen very often. So these private equity guys um you know they call they say it's they there's no market so they say it's mark to model. Well what model? Whose model? Um I call it mark to myth. Uh so um you have all sorts of room for um things that will favor either exiting investors or entering investors and disfavor the other group um in a way that I believe represents impossible impossible conflicts of interest. And even if there were no conflicts of interest, who the heck knows what a private business is worth. >> Yeah. >> If there's no liquid market for its securities, >> and if they're taking a percentage of assets, that's their fee. The higher they make that mark, the more fees they actually get. So they I mean, it's >> And if you actually look at the marks of these, you know, the average stock, you know, depending on tariffs, interest rates, whatever, and the average year fluctuates by 50% in value. these private equity guys just hold everything at the same price as if you know it's worth the same and it's not. Uh so you know one of the one of the reasons you know big institutions like to invest a lot of money in private equity is actually because it's not as volatile as their stock portfolio. Well actually it's more volatile because you have an illquid private company. Um but but they get the comfort of the private equity managers telling them that it's all smooth and hey the stock market was down 20% in April but you know your private equity portfolio didn't fluctuate in value at all. I was like nah that's just a big lie. >> Yeah it doesn't work that way. Um okay so Whitney you've got a a credible knack for simplifying and distilling financial complex rather uh concepts rather than make them complex. You make investing simple. So, just real quickly, would you tell us your four rules for a wealthy retirement? >> Um, well, sure. Um, and by the way, um, you know, I'm a stock picker. We are, we at Stanbury Research here are in the business of, you know, finding winning stocks, but that actually comes is probably the least important piece of it to uh, build long-term wealth. Uh, the first and foremost is is you need a steady income. Uh I see so many people um including people in my family right now who've been laid off from work who are out there you know looking at becoming urbal life franchisees or getting sucked into uh you know the the the business some business opportunity. Um and for the vast vast vast majority of people um uh having a steady job building a career where you get promoted over time uh where you have you know provides you with uh reasonable health care benefits for you and your family etc. But number one um you know make focus on your career and developing really valuable skills that aren't going to get knocked out by AI or foreign competition or whatever. Um so ideally in the professional world build a career so uh income a steady income you know my parents are both teachers over their lives they met and married in the peace corps they've never either of them has ever had substantial income even you know what I earned first year out of business school 30 years ago neither have ever earned that but they have a very comfortable retirement uh because both of them have always worked so two people two incomes every single year for 50 years um uh you know growing enough at least to you know keep up with inflation. It would be number one. Then number two is live beneath your means and that is again uh my parents are teachers uh but boy they can uh they never had high income but we squeezed every dollar to this day. My mom clipped coupons and would every time she went to the supermarket she would come home cackling about how much she saved with her you know fist full of coupons. Um we never uh owned you uh new cars for example. Uh so uh you know it's so so easy particularly in today's world where on your phone they're just every you can with a swipe you can buy anything in the world you want on Amazon and have it at your doorstep the next day etc. Um all these products uh buy now pay later on CLA uh and a firm um this is just all forms of debt. Uh there's all sorts of there's there's the only real really good type of debt is a fixed rate 30-year mortgage ideally locked in a few years ago at a low rate like 3%. Um that's the greatest uh form of debt ever. Uh government subsidized you know fixed rate debt where you have the option to refinance lower but if interest rates go up as they have in recent years you're still you've still got 3% mortgage but other than that credit card debt is absolutely deadly. uh um uh buy now pay later all and just the ease of buying things. Forget debt. Just it's e so easy to overspend to have subscriptions to Netflix and Disney Plus and all these little monthly payments add up. Just look at your credit card statement. I think you'd be shocked at how much all these monthly payments add up. Um so, uh whatever your income is, live beneath it such that every single year you are a net saver. So that means uh that leads me to step number three, which is take your savings and max out to the extent possible on your retirement accounts, especially if your employer matches you. Uh that's free money. And so, you know, often, um that's another good reason to have a job is you might have an employer that supplements you with, you know, a few thousand dollar a year. I think the the latest I've seen is um any American can put aside $23,000 a year into a tax deferred account and that can compound now until age 59 and a half uh is when you can start withdrawing money without paying the 10% penalty. But you don't have to start withdrawing at that age. You can keep it compounding um and make the miracle the magic of compounding work for you. And in an ideal world, that money comes out of your paycheck such that it never even hits your bank account. Uh and so that would be step three. And then this fourth step is um invest the money in the stock market. Now, this is where uh Matt I wrote recently about some changes I've made. But the default option I've been using for decades for each of my three daughters now in their 20s entering the working world for my sister, my parents, is have the money go into your the money that's withdrawn from your paycheck goes directly into a retirement account in a Vanguard or Fidelity or something like that and then is automatically invested into the S&P 500 uh index fund. Super low cost. Um and the S&P 500 index has outperformed you know depending on what time period you look at you know 80 plus% of actively managed funds and um and that has resulted in uh very very nice nest eggs for you know my sister my parents starting to build for my daughters um the S&P 500 has been a has been a fabulous investment but the key is is don't look at it don't get freaked out by you know the stocks market falls 20% in April um and you get scared out at the bottom, you know, maybe look at it once a year because effectively what you're doing is you're dollar cost averaging over a long period of time into 500 big US companies basically into the US economy, US stock market and um and but the key is is don't try and time it or do anything. Have it just be and automatically set up. That's sort of the base advice. Um, and then, you know, if you want, uh, I can sort of talk about how I've sort of tweaked that advice just in the past week in my own account. >> Yeah, I was going to say, you know, get rich slowly is the is the the proper way to do it. Um, but like you said, you made a big change. U, I personally think this is exactly the right move to make. So, why don't you tell us uh, you know, the new look of your of your equity portfolio? >> Yeah. Well, it hasn't really changed that much, but basically, um, you know, I'm I'm in the stock picking business. So, I think with a portion of my money, I can try and do better with the market, but, um, uh, because I, uh, uh, we at Stanbury Research have a policy of we can't trade in any of the stocks were, uh, recommending to our subscribers because we don't want that conflict of interest. We always put our subscribers first. Um, so that greatly limits the stocks I'd like to buy because they're the ones I'm recommending and giving to my readers and subscribers. Uh, so my uh long-term savings are about 50% S&P 500, just SPY, the primary ETF for the S&P 500. Um, and then 50% a handful of obscure stocks that don't fit in our portfolios. I've invested in my cousin's private medical device company. You know, uh some a little a few private investments, but not much. Um you know, it's mostly a handful of liquid stocks um that just aren't a fit for Stanbury uh any of our publications. But um of the half that's in the S&P 500 um I've seen data recently that makes me concerned that um it is overweighted in a handful of stocks in a way that historically has meant it's probably a good time to diversify a bit. So by that I mean the spy the 99% of S&P 500 index funds are market cap weighted and what that means is is that the of the 500 stocks in the S&P 500 the most valuable stock is Nvidia call it $4 trillion. The least valuable stock the last I looked last week was Nphase Energy which was $4 billion. In other words, the waiting of Nvidia is 1,000 times as much as the waiting of the 500 stock in the S&P 500. So effectively if you add it up by market cap which is how the index performs the top 10 stocks. So we'd be talking you know mo mostly the magnificent 7 throw in Bergkshire Hathaway JP Morgan Chase Visa and Mastercard but it's mostly you know Tesla uh Google Amazon Alphabet um Meta Platforms. Alphabet and Google are the same company of course you know that's your top 10. those 10 stocks account for depending on the day call it almost 40% of the entire value of the S&P 500. So I just became concerned that you know half of my long-term retirement savings of that half 40% of it's just in 10 stocks now but that's a market that's that's that's what everyone's stuck in. So how do you fix that with without getting too complicated? Well, the way um I decided to fix it, the other piece of this is that the US stock market has performed dramatically better than uh international stocks in general and such that if I recall correctly, um these numbers aren't exact, but the US economy accounts for 23% of the world's GDP, but US stocks account for 75% of the world's GDP. Um, and there are good reasons for that. The US has the most dynamic uh, companies. We have the best stock markets with good investor protections, etc., etc. But boy, that's an awfully big difference, right? Um, and if you look at the ratio of the S&P 500 to an international index, um, that's diverged dramatically. So, I sort of thought to myself, you know, having some exposure to international stocks, um, might be a good idea as well. So, the two changes I made, I decided to instead of um having my portfolio, the 50% that's just indexed, instead of having all of it in the S&P 500 market cap weighted, I instead um shifted half of it to um um equal weighted such that N-Phase Energy and Nvidia are the a move in each of those stocks affects that the index fund equally. So there there are a handful of ETFs and mutual funds that are S&P 500. So it's the same 500 stocks um but it just weights them um not based on their market cap but just based on each stock is worth 1500th of the index. The ticker of one of them is RSP um which is a uh which is a lowc cost. It's probably the largest equal weighted fund. Um and then I looked for a good international a low fee. Again, I'm sticking with index funds here. This is the indexed part of my portfolio. Um, and there are a couple Vanguard funds. Uh, the one I decided to pick, but there are a couple, is VXUS. Um, and basically it's a it's 5,000 uh global stocks, but none in the US, hence XUS. Um, so it's um uh it's very diversified. It owns lots of smaller stocks as well, not just big caps internationally. And so instead of 100% I have 40 4020. So I have 40% SPY, 40% RRSP and VXUS for the balance of 20%. The one last point I want to make is is I made these changes in my retirement accounts. So I had big gains because I've owned SPY for a number of years and it's gone up, you know, two, three times from what I paid. Um, if I were to sell, if I were uh to execute this strategy in a taxable account, I would owe big capital gains on the SPY that I sold down, 60% of my SPY that I sold. So, I would not recommend um making the shift. I don't feel strongly enough about this change that I would be willing to pay big capital gains to affect this change. Um but in uh in a retirement account uh I don't think it'll make a massive difference over time. But you know my hope is is that it'll perform a little better if these uh mega if the US stock market doesn't perform quite as well as internationally. If smaller cap stocks after many years of outperformance um you know start to do a little better than the mega cap stocks, maybe I squeeze an extra point or two uh of return um out of out of my portfolio by making this shift. >> Yes. So if you own an index fund like spy has gotten extremely concentrated. If that worries you, you can move some money into things like RSP, which is an equal weighted fund, or uh VXUS, which is an international stock fund, and they're going to protect you a little bit from that overconentration in those huge US tech stocks. Whitney, I think that's great. Um, thank you so much for sharing. If you found that useful, if you want to get it in writing, we have a simple, easy report. We've put it all together for you. Just click the link in the description below. We'll get you that information. Uh, as usual, uh, like and subscribe here on YouTube so you never miss an update. We'll be off next week, but I'll be back after that.