Every few years. You know it can happen. But most 401(k) investors don’t pay attention when it happens.
“Buy-and-hold” fails as a successful long-term 401(k) investment management strategy.
The reason has nothing to do with investment management. The reason is basic psychology.
Individual 401(k) investors are prone to panic selling.
Emotional buy and sell decisions fueled by the financial media. The same talking heads who profess to help improve stock market investment outcomes.
Dalbar points out this same set of statistics.
Individual investors always underperform the benchmark stock market index over time. Because their behavior interferes with any level of their investment management discipline.
Now is a good time to think about a 401(k) investment management strategy. Especially if you have never thought about it before.
You can never guarantee your 401(k) against future stock market related losses. But you can limit the damage to your retirement plan principle.
It seems like every few years. The stock market tries to take away the investment gains it provided to your 401(k) in previous years.
When this event comes up, you must limit your 401(k) principal losses.
No matter your age. Or stage in your working career.
It is foolish to spend the next few years making up significant stock market 401(k) losses. Or losses of recent personal and company-matching 401(k) contributions.
At times, 401(k) stock market exposure should be reduced.
Not to “time the market.” But to bring common sense in to your 401(k) investment management behavior.
Will your 401(k) principal preservation efforts always work? Absolutely not. But they can limit the risk of damaging your 401(k) for years to come.
You can’t completely limit the potential of 401(k) stock market risk. But you can reduce the risk. Now and for the future.
You don’t need to think about “selling everything” in panic mode.
Instead, focus your attention on the one or two worst 401(k) mutual funds you own now.
Face it. Not every 401(k) mutual fund you own now is working. Or has worked well recently.
Those mutual funds should be sold. And the proceeds placed in the safety of the money market account for now.
Those mutual funds did not do well when the stock market was rising. They are very likely to drop in value at a faster rate now that the stock market is falling.
Keep the best mutual funds you own. Cut the loser mutual funds you own out of your 401(k).
Hold the cash proceeds from these sales in your 401(k) money market account. Until the “all clear” is given by the stock market.
You need room on your credit card to buy a sale price event on your next big buy, right?
Think the same way about your 401(k).
Ric Lager
Lager & Company, Inc.
There is no need to continue to guess with your 401(k) mutual funds. All you need is a second opinion. You deserve it.
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