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 Fails To Rally (Again)
As discussed at length in the main body of this missive, the market remains deeply oversold short-term. We expected we would get a sellable rally last week, but such was not to be. However, we continue to expect a rally given the deeply oversold conditions this coming week into which we will need to take some actions to reduce portfolio risk and raise cash.
As I noted last week:
“There are indeed some early indications that things have changed. However, with the markets VERY oversold, the best course of action going into next week is use ANY rally next week to make sure your 401k plans are balanced.”
Currently, we have our FIRST of FOUR sell-signals in place. The first signal is simply a ‘WARNING’ to pay attention to what is currently happening in the markets. Think of it as a ‘yellow flashing light’ at an intersection – slow down and be aware of your surroundings.”
We now have a confirmed “sell signal” which suggests more downward pressure on the markets going forward for now. However, we will wait for a reflexive rally to reduce equity risk into. The difference between this sell-off and that in February is that we have now broken the longer-term moving average.
Defense is now a primary strategy for 401k-plans.
- If you are overweight equities – reduce international and emerging market exposure on rallies. Bring portfolios in line to target weights if needed.
- If you are underweight equities – Hold for the moment.
- 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.