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Given present market condition, is it advisable to change my current 401k plan selection of stable value to stock/bonds?

I currently have all of my 401k funds in stable value selection of my plan. Knowing that I'm not making anything off of this selection, but I also know I don't want to buy high. Is this a situation that I should be patient and buy low or go ahead and make the plunge now? Any advice would be appreciated.

Aug 26, 2014 by Ronald from Smithfield, VA in  |  Flag
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Timing the market is always challenging. I can't answer your question specifically but I can give you a couple of thoughts.

  1. If your time horizon is quite away into the future (5 or more years) then don't worry too much about current prices.

  2. If your time horizon is close, then stocks may not be an appropriate investment

  3. This is not an all or nothing decision. Think about an asset allocation that includes several asset classes

  4. You may be "losing" money with your stable value plan when you compare your returns to inflation

Comment   |  Flag   |  Aug 26, 2014 from Alexandria, VA

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Curt makes a very point in asking how long do you have until retirement, but if you have time then I would do this in addition. I would say that you could slowly "Dollar-Cost Average" back in to the "market" in the other choices in your plan so that if the market does have a dip you will be getting more shares. Most plans allow separate allocations for existing allocations and future contributions. So take a portion of your balance and slowly add to investments and change your future allocations to active investments.

Comment   |  Flag   |  Aug 26, 2014 from Bloomingdale, IL

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There's nothing wrong with buying high if the market continues to go up. If you don't buy high today and the market continues to climb then you actually missed buying low. If you have a financial plan that fits your risk/return profile then market prices are irrelevant and you shouldn't invest or not invest because prices are high or low. In actuality you don't know if prices are low or high anyway because you are comparing prices to what has happened, and previous prices are meaningless. So in essence today's market price isn't high nor low nor in the middle, it's just today's price, that's all it is. Your portfolio's value is dependent on what prices will be not what they were.

If you agree what has happened will not predict what will happen and I told you could invest in the S&P 500 index today at a value of 2000, which is a fair market value for this example, would you invest?

Does your answer change if I told that same index was 2500 or 1500 yesterday? It shouldn't. What happened yesterday is meaningless and doesn't predict what will happen tomorrow. In other words, don't look at previous prices to determine if you should invest now or wait, because they don't tell you anything with predictive power.

In fact, most stock market gains (and losses) are concentrated in a just a handful of trading days each year, so there's a really good chance you're not gonna hold off on buying 'high' now and get them while they're 'low' later (again it goes back to what defines high and low).

If your risk/reward profile allows for it invest it all now or as Terrence mentioned DCA into over the next handful of months if you want to give yourself a chance at buying lower (or higher) depending on how the market moves over that time frame.

I look at it this way: you have a 100% chance of getting into the market now at fair value or you have a 50/50 chance that you will get into the market at a lower/higher price in the future. So do you take the known or gamble on the unknown?

Comment   |  Flag   |  Aug 27, 2014 from Lemont, IL

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Ronald,

Your investment risk should be directly related to your risk tolerance. What goes into a risk tolerance? How long until you need the money is an important factor. But also how well you can sleep at night when your money is at risk.

But owning different asset classes actually lowers risk. So if you have all of your money in a stable value fund, your risk may be actually higher than if you had some money in the stock market and the rest in a stable value fund. That's because there are multiple risks that you need to deal with. The stable value fund may completely mitigate the risk of loss due to market volatility or the business cycle. But you are extremely exposed to inflation risk. That's because the stable value funds do not keep up with inflation. In return for the low risk of loss due to market volatility, you get a very low return that right now is almost certainly below the rate of inflation.

The correct answer is that you should have a portfolio which is balanced in asset classes, geared towards your risk tolerance and you need to understand that your are invested for the long-run (depending on your age), and short-term losses are less important than long-term gains. A financial advisor can help you with your asset allocation. A financial advisor where you pay for planning will definitely do this, but others might as well. Your plan may have target-date funds. These are funds which aim your allocation at a particular target-date for retirement and change the allocation as you get closer to your retirement. You can use your retirement date to decide which fund to buy. The problem with these funds is that it ignores the rest of your financial situation and some of the funds may not work as well as advertised. Still, its better to choose the right target-date fund rather than staying in the stable value fund.

As to easing in slowly versus changing your allocation all at once versus trying to time the market. I strongly recommend not trying to time the market no one really knows if the market is high or low and people loose out trying to guess. Many studies have shown that over the long run, investing all at once is better than dollar cost averaging and easing into the market. So I recommend changing your allocation at one time. As you invest more from your earnings, you will automatically be dollar cost averaging into your investments.

Comment   |  Flag   |  Aug 28, 2014

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I agree with most of the previous comments about risk tolerance, age, dollar-cost-averaging and other suggestions. But here is one added point. If you are still working and contributing to a 401(k) plan you are probably under 65. An actuary would tell you that you are probably going to live at least several decades more. Over that time the kind of return you are going to get out of a stable value fund, CDs or other “guaranteed” investments will, at most, equal the rate of inflation, probably less. By choosing the “safe” route your money’s purchasing power is actually being eroded away. Even in retirement, people should continue to invest in portfolios that allow them to keep ahead of inflation, even growth their wealth.
Despite what you read in the newspapers, there is an economic renaissance going in America, led by the energy sector, but including manufacturing and technology like 3D printing. Now is not the time to hunker down. https://korvingco.wordpress.com/2014/08/28/the-real-american-transformation/

1 Comment   |  Flag   |  Aug 29, 2014 from Suffolk, VA
Ronald

I'm 32 years old, so I'll be working for at least another 30 years. I've ignored my 401k account over the past few years and left the funds in the stable value default selections, and obviously missed out on gains for the past few years. It sounds like I'll need to go ahead and change my selections that are more suitable for my age and long term goals. I've received bad financial advice in the past, informing me to wait for market corrections before changing anything. Well, that advice hasn't gotten me anywhere and now I'm in a situation of "catch up" after losing a few years.

Flag |  Sep 03, 2014 near Smithfield, VA

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Carlos Sera Level 20

People are divided into three groups. Those that are wealthy, those that are looking to build wealth and those that are in between. Everyone falls into one of these categories. Wealth goals for most people are 1) To attain wealth then 2) to preserve wealth and then 3) to get a little bit wealthier.

A 32 year old with years to work as you have described yourself is a wealth builder. Since the best opportunities for you to build wealth within your 401k plan is to own stocks, you are doing yourself a disservice owning anything other than stocks. This is somewhat radical advice but stocks provide you with the best opportunity to achieve your wealth goal the fastest.

You may have a risk profile that conflicts with the evidence but that is your main problem and the genesis of your question. Those that have answered before me make very valid points but the reality is that a 32 year old that isn't willing to take risk turns into an older man with very little money that has to go to work every day. I would not even be thinking in terms of "timing the market." It doesn't matter in your case. Plot an aggressive journey and when you achieve wealth or feel you are close to achieving wealth, which I call The Wealth Inflection Point then you can start reducing your equity exposure. But the notion of a risk profile for a 32 year old wealth builder is silly as far as I'm concerned.

Comment   |  Flag   |  Sep 25, 2015

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