How to Choose Your 401(k) Investments

Most people given the opportunity to invest in a 401(k) plan haven't the first clue about what to do. Eyes glaze over and what follows who knows.

Believe it or not, you don't need to be a financial guru to profitably manage a 401(k). You don't even need to care much about investing.

No matter who you are, your task of saving for retirement need not be any more daunting than deciding on what clothes to wear. The fact is, if you can distinguish up from down, then you possess all the knowledge necessary for becoming a whiz managing your 401(k) investments profitably.

Now the question is, which among the many investment alternatives available in a typical 401(k) plan should you choose?

My answer is stick with funds investing 100% in stocks, because history reveals stocks yield superior returns. No matter how much or how little you save, put your money to work in investments likely to give you the most bang for your buck . Stocks are where the money is at.

So, go ahead and determine which among your 401(k)'s investment alternatives will put your savings 100% in stocks. No bonds. Just 100% invested in stocks. You might find anywhere between six and a dozen funds in your 401(k) plan that qualify. While you're at it, get the "ticker symbol" for each fund (you will need this in your effort to manage your investment risk, a simple task requiring no more than five minutes a month).

Now, if you already hate this exercise, let's make it fun. Give each fund investing 100% in stocks a number, starting at one. Now go to a dart board, and start firing until you hit three of the fund numbers. Among those three funds, then, you can evenly split your 401(k) contributions.

No, this is not crazy! You're aiming for diversification in your stock investments. This way you are likely to match the performance of the broad stock market when it is rising, which is the only time you want all of your 401(k) savings invested in stocks.

Those more ambitious might take time to research the funds in their 401(k) plan investing 100% in stocks. You will be aiming for the same effect as those shooting darts. You want diversity. Whatever mix your heart desires will be fine. Growth, value, large-cap, mid-cap, small-cap might be among the terms you see describing each fund investing 100% in stocks. Just pick three and evenly split your contributions.

The main thing is focus your attention only on those alternatives investing 100% in stocks.

Now, this is important: Your periodic 401(k) contributions (weekly, bi-weekly, monthly) always will go into funds investing 100% in stocks, i.e. the funds you choose. In other words, as a matter of practice your regular contributions should be directed into stock investments, no matter what is happening in the stock market. So long as you are employed and contributing to your 401(k), you will never have to change this tactic. Of course, at some point you might decide to alter the specific funds your contributions go to (i.e. among those investing 100% in stocks). That's entirely up to you.

This might seem confusing, but right now, you don't care about the greater risk associated with investing in stocks. Trust me, you can manage this risk like a pro and prevent it from destroying your savings.

In no time at all your position in the stock funds you have chosen—the funds receiving your periodic contributions—will begin building. If history is any guide, you will have begun to see a profit from your investments, as well. You must guard your profits with your life, never assuming they will continue growing without a hiccup. There will come a time when you must act to protect your investment profits and bank your gains.

When you do this, it will be for one reason: SAFETY. Your #1 priority is ensuring the safety of your retirement savings.

Fact: Sometimes stocks become extremely risky and subject to suffering steep losses. Times like these you are better off not risking your entire 401(k) in stocks.

At such times you will transfer your 401(k) investment capital out of the funds 100% invested in stocks and into what's called a "money market fund" (like a bank savings account, but without FDIC insurance). When the stock market is being roiled you want your savings protected. That's what a "money market fund" provides.

So, in addition to funds 100% invested in stocks you also want to identify which among your 401(k)'s investment choices is the safest money market fund. A money market fund investing exclusively in U.S. Treasury Bills is the safest of all.

The money market fund will be your 401(k)'s bodyguard when the risk of suffering unbearable losses investing in stocks becomes too great.

So what we have here are the makings of a 401(k) investment strategy that can be summarized as follows...

• Plan A: Seek superior returns via a diversified position in select funds investing 100% of your money in stocks. Every penny you contribute to your 401(k) will be directed here.


• Plan B: Bank gains and preserve wealth in a safe money market fund. When your risk of suffering a steep loss investing in the stock market becomes elevated, you will park your savings in the safest investment available, a money market fund.

Your part in switching from plan A to plan B and back again is a function of a more or less mechanical effort, where in just a matter of seconds you can know with relative certainty whether opportunity in stocks is knocking or danger demanding capital preservation is the order of the day.

This 401(k) investment strategy—having worked beautifully over the past thirty years—is sure to protect you from ever having to endure devastating losses. With safety being your first priority, you also set yourself up to realize exceptional long-term gains, even surpassing professional money managers.

Granted, this strategy's capacity to deliver superior returns is by no means guaranteed. I'll have more to say on this some other time. Still, balancing your desire to maintain an utmost measure of safety, while otherwise seeking to maximize the profit potential of your retirement savings, this strategy has history on its side.

And you know what they say...

History may not repeat, but it often rhymes.

Five Minute 401(k) Investment Management

It is a fact that, no one investing in a 401(k) willfully wants to throw their money away. Also true, then, is that safety should be everyone's first priority.

How does one gain safety? By managing investment risk ... staying on top of those 401(k) investments where your money is on the line.

The task of 401(k) investment management, as I see it, requires no more than five minutes each month verifying with your own eyes if the tide you believed likely to bring you profits still is rising, much as it was when you first bought in. Checking the performance of each fund where your money is at risk, you are on guard for the one sign indicating you are vulnerable to suffering wealth-killing losses.

No matter if you agree with my focus on the stock market (because history reveals stocks are where the money is at), you could easily adapt my strategy, if you choose, to help you assess risk affecting other investments your 401(k) plan offers. Truth is, though, no matter how you decide to diversify, managing risk simply is a must.

Fortunately, this isn't rocket science: Even a teenager could do the minimal legwork needed to ensure exceptionally profitable 401(k) investment returns over the long-term.

There is just no way around it. Every 401(k) investment carries risk. Still, you have no good reason to feel helpless. Not when you can effortlessly maximize profits devising some mechanical scheme (much like *mine*) helping you better secure your #1 priority: safety. This affords you confidence to invest aggressively, seeking maximum returns on your savings, because you know what to do when your risk of suffering a terrible loss is increasing. You step aside and protect your 401(k)'s accumulated capital in a safe money market fund.

My simple strategy has worked brilliantly these past thirty years. And there is every reason to believe it will continue doing so, because here in America and across the globe the business of business likely will remain relatively the same for as far as the eye can see. Therefore, the ups and downs — the booms and busts — that are the business of business should similarly impact both the rise and fall of investment risk much as it always has. So, my 401(k) investment strategy should continue helping you navigate your way to that secure, rich retirement you deserve.

Understand. A 401(k) offers you the ability to sell winning investments without having to pay a capital gains tax on your profits. What a gift! Now, why do you suppose you are given this power? Might it be to encourage you to actively manage your investment risk?

Do this and you better ensure profits your 401(k) investments earn will remain yours.

By actively managing your Plan A investment risk you exercise power to continually build upon investment gains you've already made—gains you religiously bank when odds of profiting further no longer are in your favor. This is how relatively small sums you save in a 401(k) might more assuredly compound into that fat fortune you hope to enjoy in retirement.

Indeed, this "actively managed" 401(k) investment strategy can serve you well for the rest of your life. You should never have to change a thing about how you manage investment risk, even after you retire. After all, risk is risk, and opportunity is opportunity, no matter what your age. So, on this account, too, your task of managing your 401(k) is simplified, because once you grasp the gist of my strategy, you never will need to change a thing about how you go about building and keeping your fortune.

Five minutes per month—at most!—checking the performance of your Plan A investments hardly seems "active management." Yet for the purpose of making your participation in a 401(k) most worthwhile, five minutes is all the time you will need to distinguish risk from opportunity, as you must if you are to transform your relatively meager savings into a respectable fortune.

401(k) Investment Diversification: When & Why

When it comes to your 401(k) investments stocks are where the money is at. Yet the best strategy for getting the most bang for your buck has you investing in stocks only when odds of hitting a home run are firmly in your favor.

Let's broaden your command over that unique power your 401(k) puts at your fingertips. There's more you need to know beyond the five minutes per month it will take to stay on top of risk that could knock you out of the game.

First, you need to focus on those 401(k) fund alternatives investing your savings 100% in stocks (and nowhere else like, say, bonds). Why? Because history demonstrates stocks offer superior investment returns. So why even consider any alternative whose record compared to stocks is a history of inferior performance?

Of course, there often are practical considerations clouding the view "history" is suggesting. That is why you should be extraordinarily sensitive about risks investing in stocks. Stocks might be history's best investments, but what is known to happen over the long-term might not, for whatever reason, coincide with your lifetime. So, managing your risks investing in stocks is imperative, if history is to be any reliable guide.

Now, no matter which investment strategy you engage, there always are going to be assumptions about the future you will be making by default. My 401(k) investment strategy assumes the world will proceed in a similar fashion as has gotten us to this point. There will be ups and downs — booms and busts — just like has occurred before. Therefore, as a rule diversify investments in your 401(k)'s stock funds — that is switch from Plan B to Plan A — only when risks are reduced.

When risks investing in stocks are reduced there's a rising tide positively affecting the stock market. Diversification helps assure you profit from this rising tide. As they say, a rising tide lifts all boats, so you simply must have many boats on the water. That's why you diversify. This will increase your odds of earning a return that keeps pace with averages like the S&P 500. Diversify and the "home run" you are swinging for is better assured.

Taking the past thirty years as a guide, the strategy I am suggesting here could have you beating the S&P 500 (an industry benchmark most professionals fail to best), making you the Babe Ruth of 401(k) investing. Now, what I term "hitting home runs" investing in stocks simply involves knowing when to swing for the fence: when to move your accumulated 401(k) savings into attack mode. It is all about patiently waiting for the wind to be blowing out of the park.

So, the "why" of investment diversification is explained by the fact that, a rising tide lifts all boats, whereas the "when" comes with patient verification there's a favorable wind blowing in the stock market.

Making Your 401(k) Canary Fly

Learn to recognize risk in the stock market and you will increase your power to earn a fortune. Most importantly, though, you will ensure your power to keep the fortune you earn. This is how to retire comfortably sooner than you might imagine.

Stocks are where the money is at. So, let me help you increase your ability to recognize risk. Then, you can safely swing for the fences.

Let's dig into the 200-day moving average a bit more. As I said before, the 200-day moving average offers you something of a canary in a coal mine. With it you possess an easy way to recognize risk, helping you know when to buy and when to sell any stock market investment your 401(k) plan offers...

S&P 500 ETF [symbol: SPY] (opens in a new window)

Okay, zero in on the 200-day moving average (it's the smooth gold line). Now pay attention! When the 200-day moving average is rising the risk of suffering a loss owning SPY is small. That's when you should own it. On the other hand, when the 200-day moving average is falling the risk of loss is elevated. Better stay away. Wait for the 200-day moving average to begin rising again before buying SPY.

Great, but what if your 401(k) plan does not offer SPY as one of its investment choices? Let's say your 401(k) plan administrator is Putnam Investments. Putnam offers many fund choices investing 100% in stocks. One of the oldest is their Voyager Fund. You can use the same simple rules described above employing the 200-day moving average.

Now, every fund choice your 401(k) plan offers has a ticker symbol. With it you can use a service like BigCharts and view any fund's performance relative to its 200-day moving average.

(Heads up: On the charts to which I linked above you see "SMA (200)" at the top of each. "SMA" is "simple moving average." What you see via the gold line on these charts is the average of closing prices over the past 200 days, carried forward day after day. Now, over to the left you can enter any symbol, click the "Draw Chart" button and check out how that security is trading in relation to its 200-day moving average.)

Now, this method for assessing risk is not fail safe. As you can see if you look closely at the two examples here, there have been occasions when your investment would not have profited were you making your buy and sell decisions using the 200-day moving average as your guide. However, over periods when prices are rising strongly, the 200-day moving average will assure you huge profits, because if prices ever turn down sharply for a time, the 200-day moving average will alert you of the risk long before it comes to pass.

And to review, what should you do when the 200-day moving average turns down, telling you risk is elevated? Sell! (Or in 401(k) parlance, "switch.") Park the proceeds in a money-market fund your 401(k) plan offers, and be happy with the tiny yield you will earn. Better this than suffering a huge loss leaving your 401(k) investments in stocks!

Your 401(k) gives you one extraordinary power as a small fry investor: to lock in your investment gains tax-free! So, acting to avoid the pain of suffering huge losses really is a no-brainer. When your risk in stocks is elevated focus on safety. Stay away from any security — a stock, mutual fund, or ETF — until the 200-day moving average starts rising again (indicating your risk is reduced).

Again, this strategy is not guaranteed to consistently make you a huge winner investing your 401(k) in stocks. Yet if history is any guide, then your odds of profiting handsomely are significantly increased. The secret to this strategy is not in the winning when the 200-day moving average is rising. Rather it is in the avoiding big losses when the 200-day moving average begins to fall.

With this 401(k) investment strategy you have a simple way to manage risk investing in the riskiest of all financial assets: stocks. You can use this strategy for the rest of your life. The message of the ups and downs of the 200-day moving average — your call to action — will be the same as ever before, no matter if your age is 33 or 74.

Given the possibility that, past ups and downs will continue in a similar fashion, this strategy using the 200-day moving average to assess your risk investing in stocks, helping you make intelligent decisions with your 401(k) savings, could have you rather effortlessly beating the long-term performance of a vast majority of professional money managers (believe it or not).

Of course, this means you must periodically check up on the 200-day moving average of the various funds your 401(k) plan offers. This might take you all of five minutes a month. It could prove the most profitable five minutes of your life.