Fine Tune Your 401(k) Plan
You are losing money in your 401(k) plan, you are getting uptight and don't know what to do or how to invest.
Don't make any rash decisions.
Manage your 401(k) by fine tuning.
If you are in the above situation now, it is time to learn how to invest in rough times.
Do not manage your 401(k) by emotions.
Do not make wholesale changes, but make changes to your asset allocation over time.
If you cannot have peace of mind as you manage your 401(k), sooner or later you are likely to make an emotional decision that will be costly in the future.
Let's assume you are a middle-of-the-road or moderate investor losing money in your 401(k) plan.
You don't know how to invest.
What are your alternatives? How should you manage your 401(k) plan? We will first look at two extreme alternatives some investors choose when their emotions get the better of them.
Then we get sensible.
First extreme: Move all of your money to the safest investments in your 401(k) plan, the stable account and/or money market fund.
Also, change things so that all of your new contributions each pay period flow into these safe investments.
Now you are as safe as you can be in your 401(k) plan.
Problem: You will be earning a modest or low rate of return on all of your money.
Over the long term you need growth, a higher rate of return.
How long can you afford to hide in this safety net? When do you get more aggressive in the future and move into stock funds...
after the stock market has moved up for a few years? Second extreme: The stock funds in your 401(k) are looking cheap, so you play catch up and move all of your money to stock funds.
Problem: Unless you are very lucky, the stock market will likely continue to fall.
Your losses will mount even faster.
Then what can you do, with no dry powder left? It is one thing to take a loss of 20% or 30%.
It is quite another to take a 50% or 60% loss.
It could take years to recover.
How to invest to sensibly manage your 401(k) plan requires a strategy and some fine tuning.
Let's say that your long term comfort level is to be half in safe investments, and half in stock funds for growth.
So when you started your plan you set things up with half of your contributions going to the stable account, the other half going into stock funds.
Some time later with the stock market falling, you notice that stock funds account for only about one-third of your total assets.
You want to get back to 50-50 per your original plan.
Do not do this all at once, because your timing could be bad.
Move money in steps from the safe account to stock funds.
First, move enough money to bring your stock funds up to 40% of your total assets.
In other words, change your portfolio asset allocation to 40% stocks and 60% safe stable account.
In the process you will buy stock fund shares at a lower price, but still have plenty of room to maneuver in the future.
Then, change the allocation for your ongoing contributions, so that 100% of your money flows into stock funds vs.
50%.
Now if your stock funds continue to drop in value you are buying more shares at cheaper and cheaper prices.
Plus, you are still in a moderate position with less than half of your money at risk.
Over time, your stock funds should approach 50% of total assets as the stock market recovers.
Should they drop below 40% in a real bad market, move money again to get them back to 40%.
Meanwhile continue with 100% of contributions flowing into them.
When your 401(k) plan assets get back to 50-50, change your contribution allocation back to 50-50 as well, and maintain both allocations until things once again get out of line.
Don't make any rash decisions.
Manage your 401(k) by fine tuning.
If you are in the above situation now, it is time to learn how to invest in rough times.
Do not manage your 401(k) by emotions.
Do not make wholesale changes, but make changes to your asset allocation over time.
If you cannot have peace of mind as you manage your 401(k), sooner or later you are likely to make an emotional decision that will be costly in the future.
Let's assume you are a middle-of-the-road or moderate investor losing money in your 401(k) plan.
You don't know how to invest.
What are your alternatives? How should you manage your 401(k) plan? We will first look at two extreme alternatives some investors choose when their emotions get the better of them.
Then we get sensible.
First extreme: Move all of your money to the safest investments in your 401(k) plan, the stable account and/or money market fund.
Also, change things so that all of your new contributions each pay period flow into these safe investments.
Now you are as safe as you can be in your 401(k) plan.
Problem: You will be earning a modest or low rate of return on all of your money.
Over the long term you need growth, a higher rate of return.
How long can you afford to hide in this safety net? When do you get more aggressive in the future and move into stock funds...
after the stock market has moved up for a few years? Second extreme: The stock funds in your 401(k) are looking cheap, so you play catch up and move all of your money to stock funds.
Problem: Unless you are very lucky, the stock market will likely continue to fall.
Your losses will mount even faster.
Then what can you do, with no dry powder left? It is one thing to take a loss of 20% or 30%.
It is quite another to take a 50% or 60% loss.
It could take years to recover.
How to invest to sensibly manage your 401(k) plan requires a strategy and some fine tuning.
Let's say that your long term comfort level is to be half in safe investments, and half in stock funds for growth.
So when you started your plan you set things up with half of your contributions going to the stable account, the other half going into stock funds.
Some time later with the stock market falling, you notice that stock funds account for only about one-third of your total assets.
You want to get back to 50-50 per your original plan.
Do not do this all at once, because your timing could be bad.
Move money in steps from the safe account to stock funds.
First, move enough money to bring your stock funds up to 40% of your total assets.
In other words, change your portfolio asset allocation to 40% stocks and 60% safe stable account.
In the process you will buy stock fund shares at a lower price, but still have plenty of room to maneuver in the future.
Then, change the allocation for your ongoing contributions, so that 100% of your money flows into stock funds vs.
50%.
Now if your stock funds continue to drop in value you are buying more shares at cheaper and cheaper prices.
Plus, you are still in a moderate position with less than half of your money at risk.
Over time, your stock funds should approach 50% of total assets as the stock market recovers.
Should they drop below 40% in a real bad market, move money again to get them back to 40%.
Meanwhile continue with 100% of contributions flowing into them.
When your 401(k) plan assets get back to 50-50, change your contribution allocation back to 50-50 as well, and maintain both allocations until things once again get out of line.
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