Retired or nearing retirement, there is one common 401(k) mistake you need to avoid.
Using the same investment management strategy when you retire. As you did when you were working.
There are two basic stages of investing. The first and longest stage is where you invest to grow your company 401(k) nest egg. The long-term strategy is to ensure you will have enough money to retire one day.
The second stage is when you start relying on your 401(k) nest egg for income. This stage usually begins once you retire.
It is important that you understand the difference. These two stages should never be thought of in the same way.
The 401(k) investment decisions you make when you are working in the first stage are not suitable for the second. “Buy-and-hold” is an especially dangerous investment management strategy for retired investors.
“Buy-and-hold” means that you pick a few 401(k) mutual funds you believe are sound. Then hold onto them for the long term, hoping they will continue to rise in value.
While this strategy may work when you are working. And contributing to your 401(k) each year.
But can be disastrous once retired. That is because you are at a stage in your life where you cannot afford to “hold on.”
Since you are no longer working, you need your 401(k) account to remain as stable as possible. Your old company 401(k) can be a primary source of income!
A retired investor’s 401(k) needs to be able to sell at appropriate times. Principal preservation in the primary investment management goal. You must preserve your hard-earned 401(k) principal instead of watching it melt away.
I hear you say. “I thought it was impossible to time the market! How will I know when to sell? How do I protect against losses?” Here is the answer.
Technical analysis. “Buy-and-hold” investors rely on fundamental analysis. That analysis is all about determining what to buy. Technical analysis is more concerned with “when to buy” … and “when to sell.”
Technical analysis puts in place a series of rules. You determine at what point in declining stock market trend you decide to sell.
For example, if your 401(k) mutual funds drop in price below a certain percentage. Or dollar amount from their highs. You then follow “the rules” and sell. Period.
Technical analysis of the mutual funds on a 401(k) retirement plan menu about rules. Drop emotion and guesswork from your 401(k) investment decisions.
The ideal 401(k) investment management strategy is to make informed decisions. Rather than take your stock market losses with a “wait and see” attitude.
The goal is simple. Prevent your 401(k) retirement savings from taking too many hits. Focus on preservation of principal.
The more likely result? A more predictable and comfortable retirement.
Technical analysis may not be right for everyone. But if you are in or nearing retirement (in other words, nearing the second stage of investing), it may be right for you.
In the meantime, I hope you see at least why using a “buy-and-hold” strategy can be so risky when retired.
Remember, there are two stages of investing. Do not make the mistake of treating them the same. If you are nearing retirement, start developing a 401(k) investment plan for that second stage.
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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