No more masks! At least where I live, work, and shop. But that is not even the best news lately.
Your company 401(k) retirement plan account has been on an historic run. For over a decade, your retirement nest egg has ridden along with the stock market to all-time high price levels on more than one occasion.
If you just owned the S&P 500 Index Fund option on your default company 401(k) menu you likely enjoyed an average of 14% a year annual investment returns since 2010. Over the past five years the average annual investment return is an even higher 17% a year.
Most large and mid-cap growth mutual funds on a company 401(k) menu that owned more aggressive stocks has risen an astonishing 20% a year on average since 2010.
Congratulations. Go ahead and celebrate. When you are done, take the time to consider the investment management implications.
As long as the stock market has been around, there have been volumes of books written about the main factors that lead to stock moving higher. Those factors are the two main fundamentals; stock dividends and earnings growth.
It’s the third factor that eventually kicks your company 401(k) butt. That is where we find ourselves now. It’s called the stock market speculation phase.
At some point in the future, the speculation about future company earnings will end. The result will be the loss of a large part of the stock market gains of the past.
The S&P 500 is currently trading on 20 times forecast per-share earnings for next year, 2022. The historical average is 16 times forecast per-share earnings for the current year. If this index falls back in line with historical averages, stock dividend and earnings growth could disappear over the next few years.
I am not predicting. I am providing historical stock market perspective.
Your current all-time high company 401(k) retirement plan account balance is not promised to you. Your “buy-and-hold” and pay little or no attention to your 401(k) mutual funds has been successful in the past.
Stock market history strongly suggests the historic stock market growth will not continue at the current pace.
Your primary challenge regarding the investment management decisions going forward in your company 401(k) account is principal preservation. Any future destruction of company 401(k) principal by fully participating in the next great stock market decline must have your fully attention.
Therefore, a logical, disciplined, and organized plan to manage your stock market risk is a must.
Ric Lager
Lager & Company, Inc.
