What To Do With 401-Ks

I often get questions on how to manage a 401-K.  Should it be considered longer-term and therefore traded less frequently?  On the other hand, should it be traded just like a standard brokerage account more actively?  The fortunate thing now is that more and more companies are offering a brokerage option in their 401-K plan.  This is an option that should be available for every 401-K investor in addition to the traditional mutual funds.  It gives you the investor more tools in your belt and many of you have a lot of money in your 401-Ks.  Here’s the reason why brokerage accounts still aren’t available in most 401-Ks.  First, companies are terrified investors will not know how to manage the money and drive their savings into the ground.  In addition, companies have a fiscal responsibility to educate investors on their retirement plans and explaining stocks and exchange traded funds in addition to the standard 10 or so funds offered would be a nightmare (in their eyes).  Lastly, employers don’t want employees spending some of their work day trading stocks when they should be working and being productive.

Even with all of that, I’ve been seeing a trend towards offering a brokerage option in more and more 401-Ks (and other retirement plans) the last few years.  But, I’m afraid the crash of 2008 will slow this progression down quite a bit.  Stocks are still considered by most riskier and more complicated than mutual funds (not necessarily true).  With the stock markets perceived to be riskier than ever, employers will want to keep the options very simple and easy to understand.  So, for those of you with a brokerage option, congratulations.  You are among the few and more fortunate.  For those of you still stuck with 10-15 funds plus the “target” funds, don’t worry because there is still plenty you have to work with.

I often tell people that if I just had two options in my 401-K, cash (money market) & a S&P 500 fund, I could still make reasonable money over time and still be safe when need be.  That’s because it’s not necessarily about all the choices, it’s about whether or not you should have anything allocated to the stock market.  That’s a risk/reward decision.  Obviously, most of you do have more than two options available to you.  Most have a handful of stock funds, a couple of bond funds, some international, maybe some real estate funds, utilities funds, and a money market.  It’s not about the brand, how many stars it has, how pretty the brochure is, or how many advertisements they have on television or in Money magazine.  It’s your decision to own those funds or not.  There’s a time and place for all of these funds.

I don’t think how you manage your 401-K depends on how often you like to trade, how old you are, what profession you’re in, or anything like that.  How you manage your 401-K depends on what type of market you’re in.  For example, the 1990s were a great time to think longer-term and trade less frequently because you were just getting in your own way.  Spreading out and just riding the bull market was the correct strategy.  In 2008, that was a similar market in the sense that you shouldn’t have traded very often because the money market was the best option.  This year, I’m trading 401-Ks a little more because we’ve had big moves that have lasted a while.  We went straight down the first two months of the year and have been straight up since.  But, you have to get away from this notion that your non-retirement money is your “trading” money and your riskier money that should be in stocks and your retirement funds are your “longer-term” safe money that should be spread out and not touched or watched.  I don’t have to give you statistics on that.  Simply think back to the last several years and see if the strategy of leaving your 401-K alone has worked.  And don’t forget, you can’t just look at the balance because you always have new money going in there every month so balance would be much worse if it wasn’t for that.

Take control of your 401-K and start paying attention to it.  I’m not telling you to make several trades per week in it.  I’m saying pay attention and be more active than you’re used to.  I know what you’re saying.  “Karl, you don’t understand, my 401-K is different.  It has 7 options and only lets me trade once per month.”  I’ve seen every 401-K and every restriction you can think of and they all allow you to move to a money market when things get dangerous and allow you to get more heavily invested when the risks fall.  But, nobody’s going to call from your company and tell you when to do this so you better learn how.

By the way, I mentioned those “target” funds earlier.  Those are the ones that might be called the Target 2030 fund.  They are supposed to be for people that are retiring in 2030.  They are essentially a fund of funds.  The longer out the date, the more aggressive they are.  How stupid.  Who’s to say that when you retire, you should be more conservative.  What if the market had fallen 70% and stocks were dirt cheap when you retired?  That would be the time to buy stocks but your fund would be ultra conservative.  I’m not saying not to use those but consider them like every other fund.  If you want some volatile stock market exposure, use the longest dated fund they have and when you want to be safer, use the shortest dated fund they have.  But, don’t believe that your retirement somehow matches exactly how the market will perform.  I wish it was that easy.

The point of all of this is to consider every dollar you have and every investment you have as one.  When times are risky, lower your exposure and when stocks are cheap and the economy’s improving and the path of least resistance is up, allocate more to the markets.

Right now, I have very little exposed to the market

This post published at www.karleggerss.com

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7 Responses to “What To Do With 401-Ks”

  1. 1 Raja Kanthadai July 18, 2009 at 6:01 am

    Outstanding advice that is very valuable in this volatile trading environments. The truth is , even the most savvy investors lost lot of money in 401K in 2008, by keeping the money in target funds. I personally lost more than 30 % of the value or the last 5 – 6 years of contribution in 401K in the last year crash. I do have a plain Vanilla S&P fund and a money market fund in my fund that I will take advantage in moving money in and out depending upon where the stock market is and where it is heading.
    Thank you and keep up the good work.

  2. 2 Mehul Shah July 18, 2009 at 7:34 am

    I think the basic structure of 401K should be changed. Most of us have a few funds to trade in and out. There is no one size that fits all but people should be given option to trade in and out of any investment of their choice. Mutual fund industry lobby has to lose and people have to win. It is our money and we should be allowed to make our decisions !!

  3. 4 Paragon July 19, 2009 at 7:53 pm

    I believe its almost criminal that Congress doesn’t give more flexibility to Americans to manage their own money while working for a company. Its unfortunate that most 401k’s only become versatile when one quits working for a company and the monies are then rolled over to an IRA controlled by the individual. In the future, lower 401k returns will contribute to inadequate retirement dollars for many. This is a big problem that could place a further tax burden upon Americans in the future.

  4. 6 Joseph Valline July 20, 2009 at 9:18 pm

    Hi Karl….do you like NGS at this price….bought some around 10…wondering if its a good opportunity to add to this position….I also like steel, what’s your thoughts (etf or individual stocks…I own a little of Aks and Gti and X…

    • 7 keggerss July 22, 2009 at 5:57 am

      I like NGS technically very much right now. I think it’s the perfect time to own it. As far as steel, take a look at SLX. It’s up 55% YTD vs. X which is only up like 5%. Plus you’re more diversified. Also, I like DBB (base metals ETF).

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