At all times, I am in communication with many 401(k) participants. On phone calls, in e-mails, and on zoom calls, I am asked the same two questions. In the exact same order.
First, “Are there better mutual funds for me to own in my 401(k) now?”
There always are at least two or three. That is a reason I am talking to these 401(k) participants in the first place. Here comes the second predictable question.
“What do I buy these mutual funds with?”
Most investors have no current money market balance in their 401(k) account now.
The questions are at the core of one of the most important 401(k) investment management concepts. It is simple.
You should take advantage of a stock market decline. But you need a money market balance to buy the better mutual funds in your 401(k).
Do not have a maxed-out Visa card at the same time as the biggest sale prices of all time at your favorite retail store. The same concept applies to the stock market environment.
Get some cash in your 401(k) account now. It makes good sense for the long term.
If you do not have any cash now, here is the simple solution. Sell the worst mutual fund you own in your 401(k). Take advantage of the recent stock market “bounce.”
The rest is up to you. If you think the stock market drop is over, go ahead and upgrade your 401(k) mutual funds now. You might think there is more stock market downside. In that case keep the proceeds in the money market for now.
A 401(k) money market balance now is the seed for future retirement wealth creation. That is especially true if you buy the better mutual funds on your 401(k) menu.
The financial planning community tells you that a money market balance is “dead money.” Especially near all-time low interest rates.
That is wrong. A 401(k) money market balance preserves your retirement account value. And the last several years of investment gains and contributions.
Without a 401(k) money market balance, you ride the stock market roller coaster every few years. And you never get a chance to upgrade the 401(k) mutual funds you own.
Respect your 401(k) money market. Especially now.
You have a chance to preserve your 401(k) principal from further stock market losses. You also have a chance to put your worse 401(k) mutual funds in your rear-view mirror for the last time.
Sell your 401(k) mutual fund losers. Improve your 401(k) mutual fund selections.
The preservation and growth of your 401(k) for the long term requires a money market balance now.
Ric Lager
Lager & Company, Inc.
