Since 2008, investment management experts have predicted the death of the “balanced” portfolio. I am speaking of 60% invested in stocks. And 40% invested in bonds.
It turns out 2022 was a close repeat of 2008. When 401(k) investors needed “diversification” and “asset allocation” the most. Neither one worked. Modern Portfolio Theory failed for the second time. In a big way.
Stock and bond asset classes correlated last year. During periods of high volatility in both markets. Neither asset class provided a low volatility option.
Traditional investment management thinks of stocks and bonds as moving in opposite directions. An asset allocation to bonds historically functioned as a cushion. During major stock market declines.
But that all changed in 2022. The drawdown in bonds was due to aggressive rate hikes. Put in place by the Federal Reserve to combat historically high inflation.
Individual 401(k) investors tried to follow the old investment management rules. They suffered a huge blow in 2022. The “buy-and-hold” 401(k) investment management strategy was a losing hand last year.
It would not be too outlandish to say that 2022 has exposed some serious flaws. To most 401(k) investment management strategies the promote balanced asset allocation.
Allowing your 401(k) to cruise along on autopilot is dangerous. To your 401(k) principal. And the last several years of personal 401(k) contributions. Along with your company-matching contributions.
The days of lazy 401(k) investment management ended in 2022. Going forward, a logical, disciplined, and organized 401(k) investment management is required.
Consider a tactical asset allocation framework. Making 401(k) asset class mutual fund decisions based on the top handful of options available.
The best way to pick your mutual funds is to use Relative Strength. Each mutual fund on your default 401(k) menu is given a technical score. And each mutual fund is ranked by technical score.
Do you play fantasy football? Do you take part in the NCAA Men’s basketball pool in your office? Your 401(k) mutual funds can be ranked or seeded the same way.
Relative Strength based tactical asset allocation allows for shifting towards areas of strength. Those mutual funds on your 401(k) menu that are doing as well or better than the stock market averages.
Even more important last year. Relative Strength asset allocation identifies lagging mutual funds on your 401(k) menu. Those same mutual funds that are in danger of incurring a major loss in your 401(k) principal.
In 2022, if you owned a plain vanilla S&P 500 index mutual fund in your 401(k), you lost 20%. No stock market risk management strategy at all.
Not having a major part of your 401(k) lose that much value is possible. Relative Strength provides a big advantage because it avoids weak mutual funds. It provides clear signals when the preservation of your 401(k0 principal is required.
A stock and bond market like 2022 was difficult to navigate for many reasons. Most of the widely held investment management principals were huge disappointments.
But 2023 does not have to be a repeat. In fact, just the opposite may be true. The stock market will find a bottom at some point. And interest rates cannot keep going up forever.
Consider Relative Strength. That independent, third-party measurement of all your 401(k) mutual fund options. Ranked in order. The best mutual funds to own clearly visible.
Ric Lager
Lager & Company, Inc.
