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.
Market Breaks
As I noted three weeks ago:
“With the move in portfolios back to full target allocations, there is not much for us to do right now except to remain on the lookout for the risks which could rapidly take away our performance…but I do want to note that the market is extremely extended above its longer-term trend lines and moving averages. Historically, short-term corrective processes like we saw in February are NOT uncommon.”
Then last week I specifically noted:
“However, with rates above 3%, there could be more angst as we move into next week. Also, given the deterioration in the breadth of performance, risk has risen in the short-term.”
Well, we got “angst.”
Importantly, there are some early indications that, as discussed in the main body of this missive, that things may have changed. But it is still way too early to tell.
With the markets VERY oversold, the best course of action going into next week is to WAIT AND SEE what happens.
However, as we have repeated over the last couple of weeks, use ANY rally next week to make sure your 401k plans are balanced. Use the following guidelines for now.
- If you are overweight equities – reduce international and emerging market exposure and add to domestic exposure if needed to bring portfolios in line to target weights.
- If you are underweight equities – Hold for the moment and let’s see if the market can stabilize.
- If you are at target equity allocations use rallies to rebalance risk in portfolios.
Unfortunately, 401k plans don’t offer a lot of flexibility and have trading restrictions in many cases. Therefore, we have to minimize our movement and try and make sure we are catching major turning points. Over the next couple of weeks, we will know for certain as to whether more changes need to be done to allocations as we head into the end of the year.
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.
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