It sounds easy to do. Cut the stock and bond market losses as soon as possible in your 401(k). It turns out that common sense statement is much harder to put into practice for most 401(k) investors.
Stop loss strategies are one of the most crucial elements of 401(k) investing. The more money you preserve in the early stages of a stock market decline. The more money you can invest in your 401(k) when the stock market storm passes.
But stop loss levels are not easy. Most 401(k) investors have a tough time selling their worst-performing 401(k) mutual funds. Because they must admit they made a mistake of buying that mutual fund in the first place.
Acknowledging you were wrong is one of the more difficult things you will ever do as an investor. The only way to make it work is to have the confidence that you can make a better 401(k) mutual fund choice in the future.
A stop loss level in a 401(k) mutual funds is simple. It is a pre-determined point at which you sell a mutual fund. stock. It is a way to cut your 401(k) principal losses. The stop loss clears out your 401(k). The worst-performing mutual funds you own disappear. They do not last long in a falling stock market environment.
The worst mutual funds on a default 401(k) menu fall in price at a faster rate than the stock market averages. There is no way on earth those mutual funds belong in a 401(k) account. Ever.
My 401(k) advice clients are comfortable with 10% stop loss levels. They remember their record year-end 2021 401(k) account balance. A 10% loss from those mutual fund price levels means the worst 401(k) mutual fund is gone.
The proceeds from the mutual fund sale go into the safety of the 401(k) money market account. The principal safe. No more 401(k) money is at risk.
That means the worst thing that can happen to that part of a 401(k) is a loss of 10% from all-time high price levels. In this way, the stop loss level helps to preserves the last several years of stock market gains. Along with personal and company-matching 401(k) contributions.
The most important part of a 401(k) stop loss strategy is to honor your stop loss levels. No matter what you think or feel at the time. Any 401(k) mutual fund that drops in price to the stop loss level is gone.
There is no room in an effective 401(k) stop loss strategy for emotions. Or a 3M post it note on your computer screen. When the 401(k) mutual fund falls to the stop loss level, it is gone.
If you have questions on how best to set up 401(k) mutual fund stop losses, reach out to me. E-mail or LinkedIn message. Or leave a message in the comment section below.
I will respond right away. I set stop losses for my 401(k) advice clients all the time.
Ric Lager
Lager & Company, Inc.
