The calls and e-mail began to arrive late last year, and those same communications have accelerated since 2024 began, with the same two 401(k) investment management concerns: “When do I sell?” and “I don’t want to lose the last several years of my stock market gains.”
Worrying about the next catastrophic stock market event will not save your 401(k). Establishing a logical, disciplined, and practical investment management strategy will. Like most things in life, you need to do something because your 401(k) preservation depends on it. It is the only way to limit your future 401(k) principal losses.
You probably own at least one 401(k) mutual fund you never should have bought in the first place; this mutual fund never kept pace with the popular U.S. stock market benchmarks last year when stock prices reached all-time highs.
Let U.S. stock market history be your guide to improve your “when to sell” 401(k) mutual fund investment management decisions — the same mutual funds that lag on the way up will fall in value at a faster rate on the way down.
It’s common sense. If your 401(k) mutual fund can’t keep up with the popular stock market averages on the way up, when will it? Underperformance on the way up. Outperformance on the way down. Not the ideal investment management strategy to preserve or to grow your 401(k) account balance.
A bad mutual fund is also likely to be one of the most expensive options on your default 401(k) retirement plan menu. You pay extra for little of the stock market upside and you pay more for the extra stock market downside. Expensive and poor-performing mutual funds do not provide the investment returns you deserve. You took all the risk investing in the stock market but you never received the investment returns available.
Expensive and underperforming — not a good company 401(k) retirement plan mutual fund combination and a sure-fire way to continue to underperform in your 401(k).
Have you ever heard the phrase, “Is the juice worth the squeeze?” It comes to mind when I see 401(k) investors who continue to hold on to bad mutual funds. Be aware of the consequences of a “buy-and-hope” 401(k) investment management strategy.
Here is a possible alternative: Your default 401(k) mutual fund menu ranked by annual costs and by annual investment performance. Do you fill out a March Madness bracket? Do you take part in fantasy football? If so, you can figure out which 401(k) mutual funds to own and going forward, which 401(k) mutual funds not to own.
What about diversification, asset allocation, and dollar cost averaging? When stock prices are rising, those strategies will work. But you may still own too many lower-ranked 401(k) mutual funds for the sake of a textbook investment management theory. Your 401(k) deserves better now and in the future.
Individual investors can improve their 401(k) investment management decisions by using independent, third-party, fiduciary level of mutual fund analysis, which is a good place for a second opinion on your 401(k) mutual funds.
Sell the worst 401(k) mutual fund you currently own and put the proceeds from the sale into the money market account to preserve your 401(k) principal for the upcoming stock market “sale.” When the stock market settles down, reinvest your money market balance in a less expensive mutual fund, one that offers a better investment performance potential.
Sure, you may have lost money in your 401(k) over the last few weeks. But here is a tip most 401(k) investors don’t think about: It is a lot easier and faster to get your money back in one of the best mutual funds in your 401(k), but it is much harder to do if you own the wrong mutual fund in the first place and doing nothing to improve your 401(k) mutual funds when stocks are “on sale.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.