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posted on 06 September 2016

401k Plan Manager 01 September 2016

Written by , Clarity Financial

The Real 401k Plan Manager - A Conservative Strategy For Long-Term Investors


NOTE: I have redesigned the 401k plan manager to accurately reflect the changes in the allocation model over time. I have overlaid the actual model changes on top of the indicators to reflect the timing of the changes relative to the signals.

There are 4-steps to allocation changes based on 25% reduction increments. As noted in the chart above a 100% allocation level is equal to 60% stocks. I never advocate being 100% out of the market as it is far too difficult to reverse course when the market changes from a negative to a positive trend. Emotions keep us from taking the correct action.


Waiting For Godot

Sometimes it feels as if we are waiting for something that will never come - a reasonable entry point to increase our equity exposure. As I have been repeating over the last several weeks, sometimes it is better to "nothing" rather than to do "something" that turns out to be wrong.

This weekend, take some time to review portfolios and make a plan for what happens next. I have often equated portfolio management to tending a garden in the past. In order to have a successful and bountiful garden we must:

  1. Prepare the soil (accumulate enough cash to build a properly diversified allocation)

  2. Plant according to the season (build the allocation given the right "season")

  3. Water and fertilize (add cash regularly to the portfolio for buying opportunities)

  4. Weed (sell loser and laggards, weeds will eventually "choke" off the other plants)

  5. Harvest (take profits regularly otherwise "the bounty rots on the vine")

  6. Plant again according to the season (add new investments at the right time)

So, with this analogy in mind, here are the actions to continue taking to prepare portfolios for the next set of actions:

Step 1) Clean Up Your Portfolio

  1. Tighten up stop-loss levels to current support levels for each position.

  2. Hedge portfolios against major market declines.

  3. Take profits in positions that have been big winners

  4. Sell laggards and losers

  5. Raise cash and rebalance portfolios to target weightings.

Step 2) Compare Your Portfolio Allocation To The Model Allocation.

  1. Determine areas requiring new or increased exposure.

  2. Determine how many shares need to be purchased to fill allocation requirements.

  3. Determine cash requirements to make purchases.

  4. Re-examine portfolio to rebalance and raise sufficient cash for requirements.

  5. Determine entry price levels for each new position.

  6. Determine "stop loss" levels for each position.

  7. Determine "sell/profit taking" levels for each position.

(Note: the primary rule of investing that should NEVER be broken is: "Never invest money without knowing where you are going to sell if you are wrong, and if you are right.")

Step 3) Have positions ready to execute accordingly given the proper market set up. In this case, we are looking for a pullback to reduce the extreme overbought condition of the market without violating any major levels of support.

IMPORTANT NOTE: Taking these actions has TWO specific benefits depending on what happens in the market next.

  1. If the market pulls back to support and confirms the recent breakout is indeed a continuation of the bullish long-term trend, the actions have cleared out the "weeds" and allowed for "new planting" to benefit from the next advance.

  2. If the recent breakout turns out to be a "head fake," then the reduction of "risk" protects the portfolio against any substantial decline.

No one knows for sure where markets are headed in the next week, much less the next month, quarter, year, or five years. What we do know is that not managing risk in portfolios to hedge against something going wrong is far more detrimental to the achievement of long-term investment goals due to the inability to recover the "time" lost getting back to even.

If you need help after reading the alert; don't hesitate to contact me.

Current 401-k Allocation Model

The 401k plan allocation plan below follows the K.I.S.S. principal. By keeping the allocation extremely simplified it allows for better control of the allocation and a closer tracking to the benchmark objective over time. (If you want to make it more complicated you can, however, statistics show that simply adding more funds does not increase performance to any great degree.)


401k Choice Matching List

The list below shows sample 401k plan funds for each major category. In reality, the majority of funds all track their indices fairly closely. Therefore, if you don't see your exact fund listed, look for a fund that is similar in nature.


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