Whenever you hear professionals talking about 401ks they always mention the tax deferral and how much that matters towards your long-term returns; however, from my investment experience I believe that 401k’s will greatly underperform when compared to directly investing your after-tax income into the market.
Here are some of my main reasons:
- 401k’s offer only mutual funds which often will under perform the market indexes that can be bought using standard brokers
- 401k’s don’t allow leverage, this can result in substantial limitations
- 401k’s don’t allow you to sell options which is a very commonly used risk reduction strategy
Although utilizing leverage isn’t for everyone it can greatly outperform the market by typically increasing returns by as much as 6% per year, and selling options can greatly reduce portfolio volatility. As well during a down market it gives you the ability to buy into dips which will be the most profitable moment.
One other thing worth noting is that 401k matches are always worth it as long as you will still be working at the company long enough for it to vest; this is true because you can take the money out and pay the penalty and still end up with more money than if you didn’t contribute.
Please note that this article is purely my opinion and should not be used or considered as financial advice. This article is intended to help others think about investment concepts. If you are interested in using any strategies in this article I recommend that you consult a certified professional to better understand the many risks including loss of entire investment or even greater than your initial investment from leverage.