Smack, right up alongside the head. Your 401(k) investment program deteriorated rapidly as the stock market and the economy weakened. Who would have thought that there was so much risk of loss in those mutual funds, and ETFs? Fortunately, the pain is most often temporary, but the timing of the recovery could alter some participant retirement schedules and benefits--- not to mention the hefty confiscation level retirees can count on from Uncle Sam.
The popularity of self-directed 401(k) benefit plans is understandable. Employees typically get an instant profit from generous employer matching contributions, a variety of investment products to choose from, and portability between jobs. But the benefit to employers is far greater--- an easy, low-cost, employee benefit plan with virtually no responsibility for the safety of the investments, and no lifetime commitment to benefit payments. In some instances though, employees are required to invest too large a portion of their account in company stock--- a situation that has caused major problems in the past (Enron, for example).
401(k) plans have virtually replaced the private pension system, and in the process, have transferred total investment responsibility from trustee caliber professionals to hundreds of millions of investment amateurs. Employees get little professional guidance with regard to selecting an appropriate mix of investment vehicles from the glossies provided by 401(k) fund providers. Few Employee Benefit Department counselors have degrees (or hands-on experience) in economics, investing, or financial planning, and wind up using the "unbiased" counseling services of the funds' salespersons. How convenient for them. Interestingly, most salespersons also have no hands-on investment experience either--- go figure.
Similarly, the financial planning and accounting communities seem to have little concern about such basic investment tenets as QDI (quality, diversification, and income). If they did, there would never be instances where individual investors lose everything in their one fund, one stock, or one-property investment programs. QDI is the fire insurance policy of the investment plan, but few 401(k) participants hear about anything beyond: past market value performance numbers, future performance projections, and the like. They are not generally aware of the risks inherent in their investment programs.
This is where an understanding of investment grade value stock (IGVS) investing, the IGVSI and related market statistics becomes important to 401(k) participants, company benefit departments, accountants and other financial professionals. IGVS investing is just perfect for long-term, regular-deposit-commitment investment programs.
Somehow, we've got to get 401(k) investors to understand the framework of an investment/retirement program and, then, we have to get participants and/or their professional advisors to look inside the products being offered. As much as I hate the idea of one-size-fits-all investment products, they are generally accepted as the best way to deal with larger employer 401(k) programs--- most employers don't even know that more personalized approaches exist.
Only when some form of company, sector, or economy melt down occurs, does the head scratching (and the investigating) begin. 401(k) participants need to understand that they are not immune to the vagaries of market, economic, and interest rate cycles. Along with their employee benefit plan comes total responsibility for the long-term performance of the investment/retirement program. Are you in good hands?
Historically, IGV stocks fluctuate enough (both in general and by sector) to allow for mutual fund and ETF investors to select the less risky offerings from among the 401(k) product menu at the most advantageous times--- but all individual investors need to learn how to identify the risks and to learn how to deal with them. Typically, 401(k) participants buy the higher priced, last-year-best-performing, and hot sector offerings while they sell or avoid the various products they feel have "under performed" the market.
Nowhere else in their lives do they adopt such a perverse strategy. And nowhere else in their thinking would they blindly accept the premise that any one number represents what is, or should be, going on in their personal investment portfolios. Risk minimization begins with quality, is enhanced through diversification, and is compounded with realized income.
The first two steps require research, greed control, and discipline. The income part just requires discipline, so it should be much easier to manage. If you cannot identify and understand the individual securities within an investment product, and assess the overall quality (economic viability and risk protection), don't invest in it. If you have more than 5% of your portfolio in any one individual security, or 15% in any one sector (industrial, geographical, social, political, etc.), make some changes.
Since 401(k) plans are almost exclusively mutual fund shopping malls, it is difficult to assess the income or cash flow component of the risk minimization function. Product descriptions, or your benefits representative, should provide the answers. You can stay away from products that refuse to share the income with you, but the best way to benefit from a fund based benefit plan is to establish selling targets for the products you select. If your Blind Faith Fund Unit Value rises 10%, sell all or part of it and move the proceeds to another opportunity that is down 20%. Profit taking is the ultimate risk minimizer.
So long as we are in an environment where retirement plan income (and principal in the case of all private plans) is subject to income taxation, 401(k) participants would be wise to establish an after tax income portfolio invested in tax exempt securities--- or to vote more selfishly.
Steve Selengut
http://www.sancoservices.com
http://www.kiawahgolfinvestmentseminars.com/
Professional Portfolio Management since 1979
Author of: "The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read", and "A Millionaire's Secret Investment Strategy"
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