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.
Patience
As I noted last week:
“This week, the markets broke on several fronts which have triggered confirmed ‘sell signals’ on several levels requiring a reduction to equity risk exposure. In accordance with the model adjustments above, begin reducing portfolio equity weighting by 25% on any failed rally attempts.”
With the market trying to muster a reflexive rally, be patient and allow the oversold conditions of the market provide a better opportunity to rebalance portfolio risks.
We have been suggesting over the last couple of the months to rebalance bond holdings back to target levels as a hedge against volatility which has worked well over the last couple of weeks. For now, maintain current allocations but have a plan in place to reduce risk on a further rally.
Importantly, as always, portfolio management is about making SMALL adjustments as evidence presents itself and should never be perceived as an “all or nothing” issue.
The model below is just a “sample” allocation. Feel free to adjust the weights according to your own age, risk tolerance and goals.
Importantly, while the market remains “bullishly biased” in the short-term, the longer-term picture of increased volatility, low-forward returns and capital destruction risks still prevail. If you are near retirement, moderate your allocation accordingly to reduce the risk of loss.
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.