Suppose that the market dropped 20% in one year (as it did in 2001 and again in 2002). You might have to spend the bulk of the next big move up in the market just getting back to even, instead of making money. But suppose we were able to walk away with a flat return...or just a small loss instead. Would you agree that wed be in much better shape heading into the next move up in the market, if we could avoid the big hit? Now, there used to be a time (throughout the 1980s and 1990s), that absorbing just a small loss in a year where the market drops 20% would be called significant performance compared to (or relative to) the rest of the market. This is because folks in the market were more interested in relative returns back then, not absolute returns. The reason so many were interested in relative returns back then was because throughout the 80s and 90s, we were barreling down the highway in a secular bull market. Every pull back along the way was simply a terrific buying opportunity. You were dubbed a hero if the market dropped 25% in one year and you were able to lose only 10%. Not so today! Were not interested in relative returns and neither should you. What we are interested in is absolute returns. The methods we use (a blend of fundamental analysis and point and figure technical analysis) are not perfect every time. But they do an excellent job of telling us when supply overtakes demand. This is true whether or not we are looking at a particular mutual fund, an individual stock, a sector or the market as a whole. Whenever supply overtakes demand, lower prices are certain to follow. And we should take the steps needed to protect our retirement dollars at that time. Look, losing money impacts your returns for many years, not just one year. Thats because if we have a year where we lose 20%, well need to make 25% just to get back to where we began. Its really important that we do our very best to avoid big losses in our account...whether that account is our regular brokerage account, or our 401k account, or some other retirement plan. So what do you do to avoid big losses when the market is crashing? In 401k and other retirement accounts, we have a safety valve option which, if used properly, allows us to sidestep much of the damage. It is often called the stable value fund or the stable income fund. The stable fund is often a guaranteed insurance contract (or GIC) that will give you a safe place to park your money, out of the stock market. There are millions of people (yes, millions) who have all of their money in their retirement plans invested in the stable fund. In 2005, many of the plans that we advised had stable funds that generated yields in the neighborhood of 3% to 4% for the year. Listen: if you stayed in the stable fund for all of 2005, you beat the entire Dow Jones Industrial Average and the Standard & Poors 500 index. But this is really not the goal of the stable fund. The stable fund is an investment that really should be looked at as a parking place or a temporary spot, to hold your funds while the market is going down, or on defense. In secular bull markets, wed have little use for the stable fund, since wed want all of our funds invested all the time. But that is not the current environment we have in 2006. When the market begins to drop, well often recommend that a certain percent of your money go to the stable fund, instead of some other investment. This is because its better to just stay out of the game than to take a risk, when everythings going to the dogs. Sometimes we may recommend you have most of your money in the stable fund. It really depends on your age, your tolerance to handle the fluctuations of the market and where things are heading at that current time. If a new client comes to us when the market is falling, it may take as long as four to six months to get most of the money back into the market. It all depends on where the market is at when we begin. The stable fund is an instrument we can use to generate decent returns in an otherwise bad market. Nobodys perfect when it comes to investing, but making use of the stable fund is a useful tool to have inside of a retirement plan. It gives you more flexibility. By the way, were you aware that close to 80% of all participants in 401k plans (and other retirement plans as well) make their investment choices on the day they join the plan...and then never change them again? Since Social Security is a mess and pension plans are disappearing by the minute, managing the returns in your 401K has never been more important. |
