Can You Get More From Your 401(k)?
An option which may help to reduce volatility & enhance performance.
How should your 401(k) be invested? While some investors manage their 401(k)s themselves, others may seek a different kind of “hands-on” approach: having their retirement plan assets actively and professionally managed.
Why should a 401(k) be actively managed? In this volatile stock market climate, there are potential drawbacks to leaving a 401(k) alone. If 401(k) participants don’t adjust asset allocations in response to market conditions, or don’t adjust their investment mix for years, they can potentially lose on their investment. While “buy and hold” can be a successful investment strategy at times, passivity can be equally problematic.
Some core problems with passive or reactive approaches. When employees change their 401(k) investment preferences, they may be responding to a bad quarter. Correspondingly, many employees could miss out on great market gains because they take too long to get back into stocks and funds when a bull market starts.
There are two central problems with this DIY approach: 1) the average employee doesn’t have the knowledge base of a financial adviser; 2) the stock market does not move once every three months, but is constantly moving. Investing without monitoring and acting upon changes in the market can have an undesirable result, to say the least.
Many funds offered to 401(k) participants can move with the market. Target funds and asset allocation funds may be quite diversified. However, their performance risks emulating that of the broad market; a bad place to be in dire financial times.
Is there another way? If your goals are to make money in a down or volatile market or reduce the losses brought on by volatility, an actively managed 401(k) may be appealing. Active investment management uses technical analysis with the twin goals of buying near support levels and selling at resistance levels.
While 2011 was essentially a flat year for the S&P 500, the volatility in stocks was remarkable. More to the point, as 2011 drew to a close the S&P 500 was down about 14% across the past five years. A “buy and hold” approach has little attraction in such a market climate. The theory is that active professional management of 401(k) assets may help lower potential losses stemming from sector or asset class downturns and uncover opportunities for gains amid the volatility.1,2
If you are interested in having your 401(k) assets actively managed, you may explore this choice without having to obtain permission from your employer or plan administrator. Active 401(k) management can mean higher plan fees, but the fees may be a very small price to pay if the performance of the 401(k) improves.
Ask about this option. While past performance is no guarantee of future results, an actively managed 401(k) may offer you the potential to better meet your goals and objectives even in volatile times.