Limit Your 401(k) Losses

“The stock does not know that you own it.”
Reminiscences of a Stock Operator
Jesse Lefevre, 1923

The above quotation is one of the most profitable words of investment advice that you could ever read. The logic and truth behind this investment management concept is especially important when the stock market is in the early stages of a correction phase.

The mutual funds you currently own in your Minnesota company 401(k) account are a collection of individual stocks. When the stock market goes does, those stocks and mutual funds do not have the same investment objectives as you do.

Individual stocks will always go up-and-down and follow the general direction of the stock market.  Mutual fund managers only know who to “buy-and-hold” the company retirement plan money that you invest with them.

As a retirement plan investor, you are most interested in the preservation of your company 401(k) retirement plan account when the stock market begins to fall.

Stocks and mutual funds don’t have retirement dates; they both go on-and-on into the future.  You only have a set number of years to contribute to and manage your individual company retirement plan account.

Taking a periodic loss in your individual company retirement plan account is all part of a long-term investment management strategy. No mutual fund manager is right all the time, and everyone loses money in their stock market investments once in a while.

Remaining 100% invested during a clearly declining economic and stock market condition makes no sense whatsoever.

In the early stages of any stock market decline, you need to limit the amount of company retirement plan principal losses that you are willing to take.  You need to review the mutual funds that you currently own, and set stop loss points in order to preserve as much of your company retirement plan principal as possible.

Professional investment advisors have a plan in place to limit their losses during stock market declines. With the sophistication of investing technology today, there is no reason that individual company retirement plan participants can’t do the same thing.

If you lose 5% of the account value in your company retirement plan account, you can easily make that money back during the next stock market advance. An investment loss of 5% needs a subsequent investment return of just 5.3% to get back to the original investment.

If you lose 25% of the account value in your company retirement plan account, you need an investment return of over 33% to get your original company retirement plan account value back.

A 33% gain in your company retirement plan account may take years for you to “getting back to even” before you retire.

Ric Lager
Lager & Company, Inc.