When the market does the herky-jerky, you might be wondering how to invest in 401k funds now. This is a question I get asked daily.
Believe it or not, there is no one answer that works for everyone. I realize that your goal is to avoid investment losses but before you ask how to invest, you should first ask yourself what you investment strategy is. (HINT – If you don’t have an investment strategy you’ll always be asking yourself what to do with your 401k and other investments and you’ll always second guess yourself. This is a sure fire guarantee to keep stress front and center as the cornerstone of your investment process and I don’t recommend it at all.)
Neal’s Notes: One key question to ask yourself is if you are an optimist or pessimist when it comes to investing. Your overview has a huge impact on your investment style and results.
So you must have an investment strategy and then make a decision that’s consistent with that approach. In doesn’t matter if you want to invest $5000 or $50,000. You need a strategy.
One approach that’s very popular (and one I don’t agree with) is buy and hold. If that’s your strategy, you probably shouldn’t make any changes to your 401k or any other investment for that matter. And if you do make changes to your investments now because of the current market conditions, realize what you’ve done. You’ve thrown out your strategy.
There is nothing intrinsically wrong with changing your strategy – but you don’t want to change your strategy every time the market winds change. That’s a recipe for disaster. And at the same time, if you are a “buy and hold” person and you change your investments because your perception of the market shifts, you must stop kidding yourself. If you do that, you’re not a “buy and hold” investor anymore. You’re a “invest however I feel that day” investor. I like this strategy even less than “buy and hold”.
So what are the alternatives? Well, I’ve spoken a great deal about strategies that incorporate market sensitivity. I’ve written an entire book about one strategy I use. The book is entitled, “Why Smart People Lose A Fortune”. This particular strategy uses market indicators to “take the market’s temperature” and invest accordingly. When the market demonstrates strength, this system suggests which funds or ETF’s to purchase. When the market demonstrates weakness, it suggests selling a portion of your funds and keeping your money safely on the sidelines. The objective of this is to grow your money safely without taking undue risk. If this were your strategy, you certainly would have changed your 401k holdings some time ago. The system, rather than your intellect tells you how to invest 401k funds.
And there are various other investing methodologies and systems. Buy and hold has its pros and cons and so does the method described above. There were periods where the “market sensitive” strategy did better than buy and hold and there were times where buy and hold did better. There is no “perfect” investment methodology. Anyone who tells you she has uncovered the Holy Grail of investing is either a liar, a thief or unconscious.
So if you ask how to invest 401k funds now, it tells me you either don’t have an investment strategy or you might have the wrong one.
Have you shifted your 401k? Did you over-ride your system? What was your thought process?