As you know, the coronavirus or COVID-19 situation continues to hammer the stock and bond markets. Investors large and small are facing a level of uncertainty we haven’t experienced in over a decade.
Despite having lived through some major downturns over the years, most individual company 401(k) retirement plan participants use the same “buy-and-hold” approach that has failed them so badly during the current stock market decline.
I think there are two reasons for this. First is that, until late February, investors were enjoying the longest bull market in history. The longer the bull market, the more investors get complacent. No one was ready for things to go south.
The other reason is even more clear. Over the last 12 years, the financial media has conditioned investors to think of “buy and hold” as the default investment strategy. As a result, most individual company 401(k) retirement plan participants simply don’t know there are alternatives.
The current coronavirus pandemic stock market disaster will resolve itself at some point. When it does, there are three important things to do in your company 401(k) account.
Focus on stock market risk levels instead of investment returns
The stock markets entered a high-risk environment in mid-January. At that time, I alerted all of my individual company 401(k) retirement plan participant investment advice clients to that fact. Fully prepared for a potential stock market downturn, we began to “play defense” with their company 401(k) mutual funds.
As company 401(k) retirement plan mutual funds share prices dropped to predetermined “sell” levels, we sold some or all of those shares. That investment management strategy has allowed us to skip the majority of the current stock market declines.
Several weeks ago, our investment management strategy changed from growth of principal to preservation of principal. The proceeds from those mutual fund sales were placed in the safety of the company 401(k) money market account.
Ask yourself how much money can you afford to lose in your 401(k)
The longer this pandemic goes on, the more investors will wish they had an independent, third-party investment advisor ask them this same question weeks or months ago.
“How much money can I lost in your company 401(k) retirement plan account before you fire me?”
It’s not too late. What will you do if your company 401(k) account balance drops even more from current levels? What steps will you take to preserve the remainder of your company 401(k) account balance?
Set some principal preservation rules that allow you sleep at night. Determine in dollars or percentages at what point you decide to sell.
You can’t be too early in asking yourself these tough, unpleasant questions. But you can be too late.
Put a plan in place to go back on offense when the storm has passed
Eventually, most individual investors will get tired of the “holding” part of buy-and-hold. Bruised, battered, and sick to death of seeing all the red in their portfolio, they’ll wave the white flag. They’ll make the emotional decision to “get me out.”
This is what happened after the financial crisis in 2008. Many company 401(k) retirement plan investors missed the bull market that followed. They were too exhausted from wrestling with the bear.
After the stock markets bottom, history says you will be able to recover the vast majority of your recent stock market losses. You have to have an investment management strategy for going back on offense when the stock market risk changes in your favor.
How will you identify the best company 401(k) mutual funds to own in a rising stock market? You don’t want to own the mutual funds that dropped in value the most in a falling stock market. Those mutual fund will likely lag when the stock markets begin to go up again.
An unemotional, unbiased, rules-based investment management strategy is needed now, and in your company 401(k) retirement plan investment management future. An independent-third party investment advisor can help you in the process.
| Ric Lager Lager & Company, Inc. |
