Congratulations on your recent and current all-time high valuations of your company 401(k) retirement plan account. Truth be told, your “buy-and-hope” investment management strategy has worked exceedingly well over the last few years.
Now, the bad news. When it comes to stock market exposure with your retirement nest egg, you may be in a very dangerous stock market risk situation.
The record-breaking U.S. stock markets over the last few years has dramatically shifted the largest part of your company 401(k) account to the stock market now.
The S&P 500 index has more than doubled in the past five years. In the last 10 years, the same index has nearly quadrupled. The current inattention to a stock market risk management plan for your company 401(k) now leaves you dangerously overexposed to any meaningful U.S. stock market correction.
A more detailed analysis of your current company 401(k) mutual funds could bring even worse news.
Even if you own four to five mutual funds in your 401(k) account now, you are very likely extremely over-exposed to a handful of popular stocks. Tesla, Facebook, Amazon, Netflix, Alphabet Inc. (Google), and Microsoft.
If you own an index mutual fund, a growth mutual fund or even a target date mutual fund, you are up-to-your-eyeballs in these stocks in each type of mutual fund. You have an extreme exposure to a few stocks in the most popular stock market averages.
Here’s the most common-sense disclaimer on what I am about to explain. Always take into consideration your current age and desired years left in your working career in order to determine your true level of stock market risk.
When you’re younger or earlier in your career, you can afford to make riskier investments. If you are older and don’t plan on working many more years, the opposite is true.
Fidelity Investments recently published reports on the retirement plans the company handles. Fidelity estimates about 20% of 401(k) participants in the baby boomer age range own more stock than they’d recommend for someone of their age.
No one knows for sure. But if the U.S. stock markets take a dive in the next few years before your desired retirement date, you will not have the luxury of recent record high stock market gains to cushion the fall.
You also will not have much more time left in your working career to regain your personal and company-matching 401(k) contributions.
Remember, you will not pay any current income taxes when you rebalance your company 401(k) account. Much less exposure to your current level of stock market risk may deserve your attention now.
No one know the direction of the U.S. stock market near-term or long-term. The only thing we know for sure is that you should take the necessary investment management steps now to preserve your current company 401(k) retirement plan account balance.
Ric Lager
Lager & Company, Inc.
