A big part of my 401(k) investment advice practice is dealing with stock market risk. Specifically, tail risk.
What is tail risk?
Look at the graphic I have included in this post. The red line is a bell curve.
When looking at all stock market scenarios, they are plotted on a bell curve chart. That chart will always have the most common scenarios plotted out in the middle or high peak.
The middle of the chart would be the historical average of U.S. stock market investment returns. Out at the ends of the chart you will notice it is smaller. That is because the situations where the stock markets go up over 50% in any year are few.
On the other end of the chart, the scenarios where the stock market are down over 50% in any year are also few. These extreme ends of the bell curve the tails.
This chart is the best “picture” of stock market risk. Normal annual investment returns will fall into the tails. The ends of the tails do not happen very often. But you must be ready when they do.
The biggest “tail risk” I worry about with my 401(k) investment advice clients is clear. I do not want the right side of this bell curve to take place towards the end of their working career. Or in the first few years of their desired retirement date.
The highest priority of a 401(k) investment management is to preserve your principal. Along with your personal 401(k) contributions. And company-matching annual 401(k) contributions.
You cannot remain 100% exposed to a dramatic stock market loss event. Toward the end of your working career. Or in retirement. Because you do not have the years left to contribute to your 401(k) account. Or receive any more company-matching contributions to your 401(k) account.
The first three quarters of 2022 have been brutal. Individual 401(k) investors have experienced a tail-like situation. That is, a significant stock market loss environment. The bad tail on the right hand side of the bell curve.
What steps are you taking now to preserve your 401(k) principal? And your personal and company-matching 401(k) contributions?
Those are the questions I help answer for my individual 401(k) investment advice clients. At all stages of their working career. No matter how many more years to their desired retirement date.
Does your 401(k) account have a principal preservation strategy now? If not, let’s exchange some information.
I can provide a timely “second opinion” on your default company 401(k) mutual fund menu. And your existing 401(k) mutual fund holdings.
It might be worth your time. It may help preserve your 401(k) principal.
Ric Lager
Lager & Company, Inc.
