- A layman’s guide to managing your workplace retirement accounts. Part 1 Terms and Definitions.
- A layman’s guide to managing your workplace retirement accounts. Part 2 Introduction.
- A layman’s guide to managing your workplace retirement accounts. Part 3 How to spot major market inflection points.
- A layman’s guide to managing your workplace retirement accounts. Part 4 Choosing a mutual fund.
- The Meb Faber Timing Model
UPDATE 3/22/17: I no longer move my money between a mutual fund and a money market account based on market conditions. It proved to not work as well as intended, and added more time to my already busy schedule. I intend, at some point, to find a better system for that strategy. I buy and hold the best fund available currently. I do monitor to make sure I am still in that fund, but I no longer rotate my money.
However, the rest of the guide which details how to choose a fund is still very relevent and useful.
The problem is…
Whether it is a 401k, pension, 403b or any other moniker often times workplace retirement accounts are very limited. They have a small universe of funds and often a large percentage of the funds underperform. There are usually strict transfer rules on many of the funds, wherein if you transfer out of a fund you cannot transfer back in for 30 days.
These limitations limit performance, but the real problem lies in the fact that most people have absolutely no strategy regarding how they will manage these accounts. The problem stems from the severe lack of personal finance education in our education system as well as in our workplace environment. The education that is provided is not typically the most sound advice, in my opinion. Often times you will hear from an “expert” who will essentially tell you that you should always be fully invested into one of the fund options provided. Be it a target retirement fund, a mid/large/small cap growth and or value fund(I will expand on these terms), an emerging markets fund, etc.
Often times the retirement account website will have an automated system that will help you to allocate your retirement savings into funds based on your risk tolerance, age, target retirement date etc. If you say you are very young and what to be very aggressive the system may choose for you to be in a high percentage of small cap growth and/or emerging markets funds. While they are correct that these types of stocks can provide the best growth over long periods of time, it does not mean that the individual funds selected will be able to perform on par or better than the major indexes underlying these particular asset classes.
A money rotation strategy is possible
I will expand on how to choose a fund in your retirement account in a future blog post. First I want to get to the real issue that I think can vastly change the performance of your retirement account over the very long term. Fund selection is not nearly as important as the ability to know when to sell out of the fund you have chosen and go to a money market or fixed income option. Often times this is labeled as the least aggressive option. It is essentially a savings account. It often pays a decent interest rate, but more importantly it provides protection from equities when the market reaches key inflection points that CAN supersede major market downturns.
These inflection points do not happen often, and the are often times false alarms meaning you will transfer to your money market account and the market will end its correction without a major crash and you will get back into your chosen mutual funds. These false alarms often times not do have much effect on your account. If you had stayed in your fund and/or sold and reentered you would not likely see a major difference in your returns over that time period. Where you will see a difference is when you can avoid the major bear markets such as the one we saw in 2008.
I will expand on the process for spotting the major trend changes, or inflection points in Part 2. Keep in mind there is absolutely no strategy that is right 100% of the time. In fact most strategies are not right 60% of the time. It is the rules of the strategy that matter more than the times it is right. In fact this strategy is “wrong” often. But if you read carefully you will have noticed that when it is wrong it often times is not detrimental to you account. If it is it will likely be fairly minor in the very long term. Remember that this strategy is for those thinking very long term. If you are close to retirement I would not recommend you follow this strategy. Ideally if you are close to retirement you should be in less volatile investments and not stock mutual funds.
Check out part 3 for the market timing part of the strategy.
Other posts in the managing your workplace retirement accounts series:
- Part 1: Terms and Definitions
- Part 2: Introduction
- Part 3: How to Spot Major Market Inflection Points
- Part 4: Choosing a Mutual Fund
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