It is easy to fall into the trap. The trap set by the financial media talking heads.
The stock market rally last week touted as “the bottom” of the current stock market decline. Because the Federal Reserve seems to be done raising interest rates for the near future.
The financial media will grab on to any reason they can find. To promote the upward bias of stock prices. Any amount of good news is welcomed by individual investors.
Let me take the other side of the stock market bottom argument.
Inflation is still at the highest level in 40 years. It may have peaked in some prices and services. Or it may have not peaked yet. Either way, the Federal Reserve will remain focused on quelling inflation. They do that by slowing economic growth. Like they did this week through higher interest rates.
The stock market has shown no signs of stress since the mid-June bottom. In fact, it has rallied by over 12% as measured by the S&P 500.
Here is the key investment management point about your 401(k) account.
The Federal Reserve does not care about declining stock prices. Or rising interest rates. They only care about wringing inflation out of the U.S. monetary system. Fighting inflation is their only concern now.
The bottom of the stock market decline may be established. For now. If you do not believe it, lister to the financial media talking heads. Or read a couple of articles from your favorite financial news web site.
Think about taking advantage of the current stock market rally to get out of some of your worst 401(k) mutual funds. You do not need to “sell everything.” And hide under your desk. At home or at work.
There is a long and growing list of economic weakness. Many companies reporting second quarter earnings the last two weeks admitted the same.
Set a stop loss level on the 401(k) mutual funds you own now. The stock markets are as likely to back up from current levels. Do not “give back” your recent double-digit gains.
Most 401(k) investors own at least five or six mutual funds. I have been providing investment advice to 401(k) investors since 1999. The 401(k) accounts I review all own a least a couple of high-cost and poor-performing mutual funds.
The recent stock market rally provides you a chance to “get back to even” faster. The first step in that process is to sell the worst 401(k) mutual funds you own after a stock market advance.
The stock market will find a final bottom at some point. Until then, you want to have a cash balance in your 401(k). To upgrade the quality of the mutual funds you own on your default 401(k) mutual fund menu.
Ric Lager
Lager & Company, Inc.
