Written by Lance Roberts, Clarity Financial
The Real 401k Plan Manager – A Conservative Strategy For Long-Term Investors
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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.
It Just Keeps Getting Nuttier…
Over the last several weeks, I have noted how the current advance just keeps getting “nuttier.” The acceleration of the advance is not only unsustainable, it is also dangerous, as eventually it will lead to a very sharp reversion that few investors are ready for.
But, I know. It hasn’t happened yet.
However, just because it hasn’t happened yet, does not mean it won’t. As with everything in life, “timing” is everything.
While portfolio allocations remain at target levels, for now, the time for complacency is now gone.
I have added a couple of notations to the 401k plan manager graph above. The markets have now MASSIVELY pierced the top of the long-term bullish trend channel, which only happens either at the peaks or troughs of a market trend. Secondly, as noted by the arrows, with the markets extremely overbought and extended, the risk outweighs reward at this juncture.
As I stated last week:
“Importantly, note the orange horizontal lines I have added in the two bottom buy/sell signal indicators. The market has never been this overbought since I began tracking our model in 2006. (Just for the record, it hasn’t been this overbought since the turn of the century when I began running this model in the newsletter.)”
Given the inability to hedge 401k-plans, I continue to recommended rebalancing risks in portfolios by trimming overweight equity exposure and adding to fixed income exposure.
All NEW contributions to plans should currently be adjusted to cash or cash equivalents like a stable value fund, short-duration bond fund or retirement reserves. We will use these funds opportunistically to add to weightings when corrections occur.
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. principle. 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.
