Earlier this month, I celebrated my 63rd birthday. My birthday reminded me to take the time to reconsider the amount of stock market risk in all my client’s 401(k) accounts.
Based on the current U.S. stock market price levels, the principal risk for any company 401(k) retirement plan participant is high. Since the beginning of the COVID-19 crisis, I am having many more “what keeps you up at night” conversations with my 401(k) advice clients.
The majority of my 401(k) advice clients don’t have a “do over” option. They are clearly in the later stages of their working career. They can’t add many more personal annual 401(k) account contributions. There are not many more company-matching 401(k) contributions on the horizon as well.
A logical, disciplined an organized company 401(k) retirement plan principal preservation strategy is an absolute investment management must. There have to be clear safeguards in place now to preserve the main source of retirement income for any individual retirement plan participant.
The potential loss of tens of thousands of company 401(k) retirement plan account dollars so close to the end of a working career would be a life-changing event. The necessity to sell all or part of their company 401(k) mutual funds during or near the bottom of the next great stock market decline would alter retirement plans forever.
Many of my current 401(k) advice clients had parents who relied on a pension to protect their retirement income. I don’t have one current 401(k) advice client who can rely on a pension for any level of retirement income.
Too many individual 401(k) retirement plan participants are relying on the popular target term mutual fund options. These mutual funds are designed to be a “set-it-and-forget-it” retirement plan investment management strategy.
What other area of your personal and work life could have been managed over the last year with the same lack of attention? Individual investors saving and investing for retirement have to pay attention to the risks.
The old day of guessing at what 401(k) mutual funds to buy are likely gone. Continuing to employ a “buy-and-hope” investment management strategy with your 401(k) are likely over too.
Given the volatility of the economic, political, stock market, and interest rate environments today, individual company 401(k) retirement plan investors need to be able to recognize the propensity for rapid shifts in risk levels.
The conventional wisdom of constructing portfolios with a 60% stocks-40% bonds—exactly the core target term mutual fund investment management concept–may not be the most suitable stock and bond market risk management strategy for individual 401(k) investors.
U.S. interest rates are near-zero. The future investment return potential for any bond mutual funds is also near zero. Even a small rise in interest rates will result in a noticeable drop in bond mutual fund prices.
U.S. stock market indices are near all-time highs. Stock prices may well continue to rise to even higher levels going forward. But what happens to your 401(k) account principal if the opposite takes place?
Maybe these thoughts are top-of-mind for me due to the recent reminder of my advancing age. Regardless, I urge you to have a similar “what makes you lose sleep at night” conversation with yourself regarding your current company 401(k) retirement plan account principal preservation strategy.
Ric Lager
Lager & Company, Inc.
