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Private Equity Investing Now Allowed in 401(k) Retirement Funds

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Re: Private Equity Investing Now Allowed in 401(k) Retirement Funds

#41

Post by lend000 »

missedthecue wrote: post #34
lend000 wrote: post #25

Earlier quoted context omitted.

"Investing" in publicly traded companies (most volume is just between people with no affiliation to the board and are not buying from company stock offerings) and especially holding an index fund is not really investing, in the sense that it does not allocate any resources intelligently or do anything to seed growing companies. It's simply an attempt to grow personal wealth that doesn't do anything to improve the eco…

>just buying the S&P index is actually more economically harmful. What

Buying the index just inflates the prices of all large companies held in the index without any due diligence into which ones have future potential. Not only are you failing to allocate your own capital into the economy productively, but you are counter-acting the investments of those who have made diligent investment decisions (while also providing them with alpha and a means to profit from your inefficiency).

Re: Private Equity Investing Now Allowed in 401(k) Retirement Funds

#42

Post by mactrey »

SpicyLemonZest wrote: post #36
missedthecue wrote: post #34

Earlier quoted context omitted.

>just buying the S&P index is actually more economically harmful. What

Think about what it means to buy into an index fund. When my next paycheck comes in, I'm going to use 20% of it to invest in the stock of some S&P 500 companies, even though I don't know most of their names and have no idea what results can be expected from them. Tossing money blindly at random companies isn't completely unproductive, since capital is valuable, but in terms of the underlying social purposes of invest…

Index investors are not really tossing money blindly. They are investing in a diversified portfolio and then constantly re-weighting their investment by market cap.

The alternative to that, before the rise and acceptance of index investing, was people using their 401k money to buy individual stocks. But we all know that your standard mom and pop investor is not going to have time to cut through the bullshit and effectively research companies when they have a 40hr/wk job, a family, hobbies, etc. So those 401k investments were based mostly on personal hunches, word of mouth, and pump and dump schemes. That was really dumb money, and did even less for the economy.

So while I agree with you that index investing isn't doing a ton to push corporate management to do better in the way "smart money" does (in theory), when you consider the world before index investing was a thing you have to admit that money today is on average "smarter."

Re: Private Equity Investing Now Allowed in 401(k) Retirement Funds

#43

Post by throwitawayfam »

BeetleB wrote: post #35
throwitawayfam wrote: post #31

Can someone set up a "professionally managed fund" where you can set up an LLC, have the fund invest your 401k in that LLC, pay yourself a salary equal to the amount invested? Bypassing early withdrawal fees for some nominal fee?

I suspect you phrased this poorly: 1. I set up an LLC. 2. I have a regular job which is earning me income. 3. I put some of that income into a 401K. 4. I direct the 401K to invest in my LLC. 5. As the guy running the LLC, I take that amount of money and pay myself a salary equivalent to what I put in. How is that money ever going to grow? What's the benefit? You didn't pay taxes? Pretty weak benefit, IMO. There is su…

I did word it poorly, and you captured what I was trying to get at (thanks).

The benefit is for people that need to withdraw from their 401k before retirement without getting hit with the interest/fees. I guess another part of the benefit is if you want to take advantage of employer match but you don't want to invest in your 401k.

I didn't know about self directed retirement. I'll have to go do some research.

Re: Private Equity Investing Now Allowed in 401(k) Retirement Funds

#45

Post by ajzinsbwbs »

lend000 wrote: post #25
JMTQp8lwXL wrote: post #5

Private equity isn't an appropriate asset class for 401(k)'s. Public markets have a threshold for rules/regulations and reporting requirements. You don't want your retirement account to be a casino. You want companies that can provide stable, long-term growth of your portfolio-- so the money's there when you need it.

"Investing" in publicly traded companies (most volume is just between people with no affiliation to the board and are not buying from company stock offerings) and especially holding an index fund is not really investing, in the sense that it does not allocate any resources intelligently or do anything to seed growing companies. It's simply an attempt to grow personal wealth that doesn't do anything to improve the eco…

I don’t think this characterization is really fair. The private equity model requires a market to sell into when a bet pays off (so they can make another bet). Investors who just buy the index are helping to fund that.

By analogy, house flippers rely on a market for turnkey homes.

Re: Private Equity Investing Now Allowed in 401(k) Retirement Funds

#47

Post by SpicyLemonZest »

mactrey wrote: post #42
SpicyLemonZest wrote: post #36

Earlier quoted context omitted.

Think about what it means to buy into an index fund. When my next paycheck comes in, I'm going to use 20% of it to invest in the stock of some S&P 500 companies, even though I don't know most of their names and have no idea what results can be expected from them. Tossing money blindly at random companies isn't completely unproductive, since capital is valuable, but in terms of the underlying social purposes of invest…

Index investors are not really tossing money blindly. They are investing in a diversified portfolio and then constantly re-weighting their investment by market cap. The alternative to that, before the rise and acceptance of index investing, was people using their 401k money to buy individual stocks. But we all know that your standard mom and pop investor is not going to have time to cut through the bullshit and effec…

Yeah, I certainly can't dispute that.

Re: Private Equity Investing Now Allowed in 401(k) Retirement Funds

#48

Post by ThrustVectoring »

throwitawayfam wrote: post #31

Can someone set up a "professionally managed fund" where you can set up an LLC, have the fund invest your 401k in that LLC, pay yourself a salary equal to the amount invested? Bypassing early withdrawal fees for some nominal fee?

No point. There's far easier ways to withdraw tax-deferred money before full retirement age without penalties. Waiting 5 years after a Roth conversion or a 72(t) election are far easier.

There's also self-dealing restrictions on IRAs and presumably self-directed 401(k)s as well.

Besides which, if you're fucking with the IRS, there's far better things to do than merely avoid a 10% early withdrawal penalty. Eg - have your Roth account own some company, then figure out a way to smuggle a gigantic pile of cash into said company. That money then never ends up getting taxed.

Re: Private Equity Investing Now Allowed in 401(k) Retirement Funds

#49

Post by lend000 »

ajzinsbwbs wrote: post #45
lend000 wrote: post #25

Earlier quoted context omitted.

"Investing" in publicly traded companies (most volume is just between people with no affiliation to the board and are not buying from company stock offerings) and especially holding an index fund is not really investing, in the sense that it does not allocate any resources intelligently or do anything to seed growing companies. It's simply an attempt to grow personal wealth that doesn't do anything to improve the eco…

I don’t think this characterization is really fair. The private equity model requires a market to sell into when a bet pays off (so they can make another bet). Investors who just buy the index are helping to fund that. By analogy, house flippers rely on a market for turnkey homes.

People who buy IPO's, and to a lesser extent, pick stocks, help fund that, but buying the index simply rewards companies that made it into the index and makes it harder to devalue under-performers. As with any statistically large index, some of the companies in the index will be correctly boosted by your capital, while others will be incorrectly so.

My point is not so much to decry index investing as evil as to point out the irony of index investors complaining about more productive forms of market participation.

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