The last few years the growth of your company 401(k) account has been a straight line in the upward direction. The “buy-and-hold” investment management strategy has really paid off well. Your company 401(k) mutual fund picks continue to rise in value.
Let me be the one to break the shocking news to you first. The U.S. stock markets do not always go up. There are many historical periods of violent stock market declines that last several years.
“Buy-and-hold” dictates that you should continue to always hold onto your 401(k) mutual funds. If the stock markets rise, great news. When the stock markets fall, eventually they will recover. You can eventually “break even.”
Why take the chance of losing a large part of your all-time high company 401(k) retirement plan account balance? And how do you try to protect our 401(k) account from future principal losses?
The answer is part of the technical analysis set of stock market and mutual fund analytical tools. Technical analysis determines which asset classes, and specific mutual funds on a company 401(k) menu, are “outperforming.”
An equally important use of mutual fund technical analysis tools is the determination of “when to sell.” Predictions are not necessary. An independent, third-party set of rules and guidelines is the only requirement.
My individual company 401(k) investment advice clients have in place a clear set of “stop loss” levels on each mutual fund they currently own. These stop loss levels are determined in advance.
For example, if a 401(k) mutual fund price drops below a certain price, we follow “the rules” and sell. Or, if a 401(k) mutual fund drops a predetermined percentage from its recent soaring prices, we also sell.
There are three primary benefits to company 401(k) mutual fund stop loss rules:
1. By following a stop loss rule, we can eliminate emotion and guesswork from our company 401(k) investment management decisions.
2. Stop loss rules help us avoid “selling low and buying high.” Instead of
guessing what the highs and lows will be, our predetermined mutual fund stop loss levels are based upon how much risk, in dollars or percentages, a company 401(k) investment advice client is willing to take.
3. No one knows what the stock market are likely to do next. But you can make logical and informed investment management decisions based upon how your company 401(k) mutual funds react to future stock market declines.
After years of all-time stock market highs, company 401(k) principal preservation is the most important investment management strategy now. Taking a big future risk on the current value of your company 401(k) retirement plan account is plain silly.
Mutual fund stops losses protect your company 401(k) account from another potential round of historic stock market losses.
Are you old enough to remember 2008-2009 when 401(k)’s turned into 201(k)’s.? Many of my 401(k) advice clients remember. And they do not want to see the sequel to that bad movie.
You cannot afford to go around in “401(k) circles.” You are too late in your working career to “start over.” You do not have many years left of personal and company-matching 401(k) contributions.
You cannot ever get ahead or preserve your current company 401(k) account value if you are always falling behind every few years. Your primary company 401(k) investment management goal right now should be protecting your retirement plan nest egg from more losses than you can afford.
So, ask yourself: “Do I have a strategy for protecting against losses? Do I have a strategy to avoid going around in 401(k) circles?”
Ric Lager
Lager & Company, Inc.
