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.
Mea Culpa
I made a mistake. It happens.
Two weeks ago, I wrote:
“With the weekly ‘sell signals’ still in place, but improving, I am not going to increase the allocation model just yet.
The reason we adhere so closely to our models for 401k plans is due to the restrictions on ‘trading,’ As opposed to portfolios I directly manage, where we have more latitude, I can be more opportunistic. For 401k plans, we focus on the long-term and try to limit actions to the ones that have the ‘greatest chance’ of success relative to the market. So, while it may seem we are slow to change sometimes, it is simply because we are trying to reduce the risk of a ‘whipsaw’ or ‘head fake’ from the markets.
That is exactly correct.
While we strictly adhere to our discipline, sometimes we have to relearn lessons the hard way.
Last week, I wrote:
“However, if you are so inclined, the pullback to support last week does provide an opportunity to increase exposure modestly. (I said modestly, not ‘jump in with both feet.’)”
That was a mistake as I was “anticipating” a reversal of the “sell signal.”
“Anticipation” is an emotion and has no place in portfolio management.
Lesson learned, once again.
The market is holding support, but only marginally so. Remain cautious for now and follow the rules below:
- If you are overweight equities – use any rally to reduce international and emerging market exposure.
- If you are underweight equities – do nothing for now.
- If you are at target equity allocations currently, do nothing for now.
We will review again next week.
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.