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.