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.
Rally Fails
The rally following the mid-term elections last week was a “one-day wonder.” Next week, it is critically important for the market to rally IF the bulls are going to regain control of the market.
Last week, we lowered the allocation model to 75% of target for now. There is more risk to the downside currently than upside reward. But…let me repeat from last week:
“This does NOT mean immediately go out and sell 25% of your holdings. The model moves in 25% increments as signals are triggered. However, by the time a signal is triggered, the market tends to be very oversold which is why we wait for a bounce to opportunistically sell into.”
It also doesn’t mean to go liquidate 25% of your exposure all at once. These are just model targets that you “adjust” into as market dynamics develop.
As we stated last week, we reduced equity risk in portfolios by 10%. As long as the market remains in a more negative trend we will continue to use rallies to reduce equity further until we get to the 25% target.
With BOTH of our primary SELL SIGNALS in place, it is prudent to adjust the model lower. However, continue to use rallies to reduce risk towards a target level with which you are comfortable. Remember, this model is not ABSOLUTE – it is just a guide to follow.
Defense remains our primary strategy for 401k-plans currently.
- If you are overweight equities – reduce international, emerging market, mid, and small-capitalization funds on any rally next week. Reduce overall portfolio weights to 90% of your selected allocation target.
- If you are underweight equities – reduce international, emerging market, mid, and small-capitalization funds on any rally next week but hold everything else for now.
- If you are at target equity allocations reduce overall equity exposure to 90% of your allocation target on any rally Monday.
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.
