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.
Sit Tight, The Bear Is Still Prowling
Two week’s ago, I said it was critically important for the market to rally if the bulls were going to regain control of the market. The bulls tried and rallied the market back above the 50- and 200-dma. But that was all they could do and last week, the markets fell apart retesting recent lows.
Once again, it is critically important for the “bulls” to try and rally the market next week. As I noted last week:
“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.”
With the Fed on deck on the 18th and 19th, look for more “trial balloons” next week about potential policy of stopping rate hikes. Also, it would not surprise me to start to hear more commentary from Washington about backing off some of the “trade rhetoric” with China.
Any of this would like push markets higher from deeply oversold conditions.
Given the markets remain extremely range bound, we are maintaining our current weightings in our 401k plans for now until we get confirmation about what the markets want to do next. However, 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.
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