They Don't Make Software Like That for Your 401(k)

In early 2008, you would have had to search Google very hard in order to find any article on a “housing bubble.” The same goes for finding any comments on the possibility of a major U.S. investment bank declaring bankruptcy. There also were no comments then from any “experts” on the safety of AAA-rated subprime mortgage securities.

Since then, all three of these once-thought highly unlikely events have combined to lose millions of U.S. jobs, destroy the housing market and slow the U.S. economy to a slow crawl.  

Today, a potential U.S. default on Treasury bonds and a potential downgrade of the U.S. credit rating have combined to make the U.S. stock markets extremely fragile.

In 2008, no computer software program could have predicted the combination of “once-in-a-lifetime” economic events that produced almost 50 percent losses in company retirement plan account values. Today, no computer software program can predict the outcome of the current debt-ceiling showdown.

Modern Portfolio Theory, Efficient Market Hypothesis, Rational Expectation Theory and anything else that computer-generated asset allocation software programs are based on did not save one dollar of company retirement plan account value beginning in June 2008.

The same statement can be made for the “target term” or “target date,” mutual funds that have taken over the majority of the company retirement plan account menus that I have seen here in Minnesota.

Now, with the historic political, economic, and investment uncertainty, the biggest mistake a 401(k) plan participant could make would be to rely upon the company retirement plan software tools to make the necessary investment management decisions in order to preserve your company retirement plan account principal.

Said another way, no 401(k) company retirement plan participant can ever afford a repeat of the last great stock market decline.

Today, your “risk tolerance” and your “target retirement date” mean nothing. So does your age and your current "asset allocation." 

In my experience, with great stock market declines a 20-year-old company retirement plan participant has the same investment objective today as a 65-year-old company retirement plan participant. That is, each participant does not want another opportunity to lose almost 50 percent of their company retirement plan account value over a few months.

Company retirement plan software tools rely on historical stock market investment returns. You can’t concern yourself with history now; you have to deal with the present pollitical environment and how it is currently shaping the stock market and economic environment.

The U.S. Treasury debt has never been downgraded before. The U.S. has never defaulted on its Treasury debt before. They don’t make software for what is going on now in the world to help with the investment management for your company retirement plan account.

Have a plan and make that plan happen in your 401(k) company retirement plan account in the next few days. Only take on the investment risk now that you are currently comfortable with.

Ric Lager
Lager & Company, Inc.