Written by Lance Roberts, Clarity Financial
The Real 401k Plan Manager – A Conservative Strategy For Long-Term Investors
Please share this article – Go to very top of page, right hand side, for social media buttons.
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.
Hold Onto The Reigns
As I stated last week:
“Next week, it is critically important for the market to rally IF the bulls are going to regain control of the market. It didn’t and the bulls are in a very weak position currently.”
The good news is that over the last few days the bulls finally strung together a rally. However, it hasn’t changed much as the market remains close to registering a much more important long-term “sell” signal.
However, it is important to recognize that markets are generally optimistically biased and looks for “reasons” to rally regardless of whether there is real “merit” to it.
Last week was a good example as stocks rallied on news from the Fed they were close to ending rate hikes and hopes that Trump would cease the “trade war” with China. There isn’t much merit to either one of these reasons but the markets avoided any real analysis to go with “hope.”
We are maintaining our current weightings in our 401k plans for now until we see where the current bout of optimism can get us to. With confirmed “sell signals” in place, defense remains our primary strategy for 401k-plans currently.
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.
- If you are overweight equities – reduce international, emerging market, mid, and small-capitalization funds on any rally next week. Reduce overall portfolio weights to 75% 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 hold for now.
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.