I talk with several individual 401(k) participants each day. I have a growing concern that few are prepared for the potential risk of principal loss.
The last 12 years has lulled many 401(k) investors into a false sense of continual optimism. Stocks and bonds have risen to levels that are worrisome from a valuation standpoint.
Individual 401(k) investors should prepare for potential surprises later in 2022.
The Federal Reserve took interest rates to zero after the pandemic hit in 2020. This move went beyond stimulus. Money rushed into the stock markets. Because there were no other investment returns options.
The money flow into 401(k) mutual funds over the last two years is clear. 401(k) investors have pushed their retirement account money into stocks. No one is thinking about the possibility of a major bear market.
At the same time, the current stock market investment management wisdom is to always “buy the dip.” Each time the stock market pulls back, more money rushes in to take advantage of the “sale” prices.
Historically, every bear market started out as a temporary correction. And every bigger bear market started out as a small bear market.
A major change in Federal Reserve monetary policy has begun. U.S. interest rates have begun to go up for the first time in a generation of 401(k) investors.
Do not assume that because the U.S. stock market have gone down, and then straight back up, they will stop there. One of these stock market pullbacks is not going to stop. And go right back it. The stock markets may keep falling instead.
Many individual 401(k) investors are in their prime working careers. Another group is within a few years of retirement goals. These investors have established 401(k) accounts. A strong effort must be made to preserve principal in times of stock and bond market uncertainty.
What happens if a mid or late career 401(k) investor endures another bear market loss of 20%? That same 401(k) investor needs a 25% gain to “get back to even.”
The best thing to do now is to set a “stop loss” in your 401(k) account. What you are trying to do is to mitigate the risk of a meaningful stock market decline. Your 401(k) account would drop less than the stock market averages.
Safety in your 401(k) is your primary investment management goal now. Focus on implementing a defensive stock market and interest rate strategy.
Ric Lager
Lager & Company, Inc.
