How to keep your 401k from turning into a 201k

As you may have noticed, market volatility came back in a big way in October. Volatility is fantastic, as long as the market keeps climbing towards the clouds. Unfortunately, in this case it was multiple days of over 1% declines in the major indices.

While some of my clients want to try and wring every last percentage point advantage over “the market”, the true key to financial planning is to have peace of mind, regardless of market conditions. We want security during the down times and growth during the good times. Over my time helping people invest I have learned that, panic selling (and buying!) go along way towards making people poor in a quick fashion.

Every radio talk host, internet warrior with a blog, and suit-and-tie money manager out there has a (usually very strong) opinion on the way to best get you the highest yields. Generally they are happy to opine, show you back tested results, and run Monte-Carlo simulations until the cows come home to support their way, and their way only. Buy and hold! Don’t catch a falling knife! Dollar-cost-average! Most techniques seem to work well…until they don’t. It was 13 years form the top of the tech bubble until those investors would be whole again, and no one says their gains over the last 5 years won’t vaporize in the next 48 hours.

How I help my client’s is by honestly looking them in the eye and telling them I have no idea what the market is going to do. Not the best sales technique I admit for gaining clients, but the best for the people who want an honest advisor that does what is right for them. What I do have is a strategy to try and ensure their overall financial situation can weather any storm, grow in the sunshine of a good market, and be properly diversified against prolonged downturns.
There are three basic investment strategies that all work together to achieve a robust plan that works in any condition.

1. Equity based investments. I.E….the rollercoaster. We all liked rollercoasters when we were young. They are both exciting and loud and you can either join in or stand back and watch while they provide excitement. Such is the case with single stocks, ETFs and mutual funds, or even leveraged ETFs that provide 3x the returns (both positive and negative) of an underlying index! During the good years, man oh man…you watch your retirement accounts and start planning what color boat you are going to buy when you inevitably retire in a few short years. Some of the younger generation, who only became involved in the stock market since 2009, wonder how their 401k plans will manage to hold all that money they make in the next 10 years. Equities are an excellent place to earn reward with the attendant risk, and over the long run, hopefully make substantial compound returns.

2. Fixed investments. I.E…your grandkids are on the rollercoaster and you are kicked back on the bench watching, thankful for the ability to relax. You know, because you were around in the 80s, the tech bubble, and 2008, that low interest rates and double-digit market returns are fantastic, but nothing in this life is guaranteed. Making money is fine, but frankly at this point, not losing money is the main goal. You know if you sat at the black-jack table and won $100 that is fun but losing that same $100 causes far more pain than the win. These are your safe bonds, money market, and certificate of deposit options, and multi-year guarantee annuities. You should NOT be paying a money manager a fee for doing this for you. I know, odd hearing that from a money manager, but there it is.

3. Fixed-indexed solutions. These are a mix of both worlds. Generally backed by insurance companies they have the no-loss guarantees of a fixed product with some of the market upside of a traditional stock market investment. Not a cure-all, they suffer from liquidity issues and should only be a part of the overall portfolio. However, if you want an upwards ratchet, and not a roller coaster, these are your best bet.

The point is not that one strategy is better than the other. The point is that every situation is different and an allocation model based on your particular solution can both give you gains during the good years with reduced downside when the market takes a tumble. It never ceases to amaze me that people will string two sentences together, sometimes in almost the same breath:

“Past performance is no guarantee of future results”
“The market will always come back”

Both of these are probably generally true but having a portfolio that can withstand protracted down or sideways years while still taking advantage of banner bull runs provides peace of mind and real returns. Finding a financial advisor who doesn’t have a dog in the fight, who is a fiduciary, and whose business relies on your overall growth is key to achieving long term wealth and the happiness that goes along with achieving financial security.