Over the last 10+ years the long-term direction of the US stock market has been higher. Individual company 401(k) retirement plan participants have been able to play the “buy-and-hope” investment management strategy game with success.
When the stock market is rising and interest rates are falling, every company 401(k) retirement plan mutual fund goes up. Annual contributions and company matching contributions have led to higher 401(k) values each quarter.
In the last few weeks, the stock market risk environment has changed. There is no longer an opportunity to grow your company 401(k) account principal. The best investment management move to make now is to preserve your company 401(k) retirement plan account principal.
Fight off the natural human reaction to “do nothing” in the face of the current stock market decline. Instead, use a common sense approach to rebalance your company 401(k) mutual funds now.
I don’t mean the standard definition of rebalancing. That is marketing hype from mutual fund companies. Instead, here is the best way to rebalance your current company 401(k) mutual fund holdings in a higher risk stock market environment.
You most likely own a mutual fund that underperformed the stock market averages when the stock market was rising. You are taking all of the risk by remaining 100% invested in U.S. stocks. But you are not being rewarded for taking those risks. That is a very bad stock market investment management strategy.
Sell any mutual funds you currently own that have lagged the S&P 500 index when the stock market was rising. That same mutual fund has most likely fallen in value at a faster rate during the recent May stock market decline.
Lagging in a rising stock market and leading in a down stock market is the definition of a bad mutual fund choice. The current stock market weakness is the perfect time to improve your company 401(k) retirement plan account mutual fund choices.
Use the proceeds from any mutual fund sales now to fund an investment in the money market account on your company 401(k) retirement plan menu. This money market option is sometimes called the stable value account.
The best way to take full advantage of the current high stock market risk levels and declining prices is to build up the money market balance in your 401(k).
Does that sound like market timing to you? Here is why it’s not.
Market timing never works over the long term. You have to guess right on the “buy” and guess right on the “sell” over and over again. Not even professional money managers can consistently do that.
There is an investment performance gap in your company 401(k) retirement plan account. The gap is between the investment performance of the mutual funds you currently own versus the mutual funds available to you. A weak stock market is the best opportunity to close that gap.
What is your favorite retail store? You love it when they have sales, right?
You have to have the money available to buy things you want to own when they are on sale. The stock market is no different.
The stock market is now on sale. You don’t know how much lower the sale prices will go or how long the sale will last.
Rebalancing your current company 401(k) retirement plan mutual funds now will provide you with the money to buy better mutual funds at lower prices in the future. Use the current stock market weakness to upgrade the mutual funds you own in your company 401(k).
Ric Lager
Lager & Company, Inc.
