Written by Lance Roberts, Clarity Financial
The Real 401k Plan Manager – A Conservative Strategy For Long-Term Investors
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.
Pushing Extremes
From last week:
“As discussed over the last couple of weeks, the markets not only reversed the breakdown, and rallied to new highs, as expected previously, investor confidence has exploded since the election.
That’s the good news.
However, this rally is likely done for the moment and we need to wait for a bit of rebalancing before increasing target exposures heading into the new year.”
I was clearly wrong on the second point as the market continued to rally this past week, but, as discussed in the main body of this week’s newsletter, it is a narrow advance and reminiscent of previous market melt-ups.
I continue to suggest using the current rally to clean up portfolios as detailed in November 4th missive. Here are the important points.
Step 1) Clean Up Your Portfolio
Tighten up stop-loss levels to current support levels for each position.
Hedge portfolios against major market declines.
Take profits in positions that have been big winners
Sell laggards and losers
Raise cash and rebalance portfolios to target weightings.
Step 2) Compare Your Portfolio Allocation To The Model Allocation.
Determine areas requiring new or increased exposure.
Determine how many shares need to be purchased to fill allocation requirements.
Determine cash requirements to make purchases.
Re-examine portfolio to rebalance and raise sufficient cash for requirements.
Determine entry price levels for each new position.
Determine “stop loss” levels for each position.
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 rally which will reduce the short-term oversold condition of the market and allow for a better opportunity to reduce overall portfolio risk.
The big risk in the near-term is when the markets come to grips with the rise in rates, simultaneously with a stronger dollar, which will quickly erode earnings in an already over-valued market. IF the Fed hikes rates in December, we could well see another January swoon as we saw this year as much of the backdrop is still extremely weak.
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.
