Should I re-allocate my 401-k?

Question

I am a young investor ( 29 ) and currently I have my 401K plan heavily weighted towards equity. It's about 80% equity ( 40 international and 40 domestic ) and 20% in multi-sector bond fund. Recently there have been indicators that the market will go through a "correction" and Merril Lynch inssued a whole house sell order and advised it's clients to reduce there equity holdings. If there is a correction I will certainly have time to ride it out being only 29, but if I move to safer waters for the time being and then move back towards equity once the market has stabilized, I stand to come out ahead. That is my thinking anyway. Am I mistaken?

I apologize, it was not Merill, it was the other big M. Morgan Stanley.

http://www.newsmax.com/money/archives/articles/2007/6/8/163426.cfm

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"Morgan Stanley issued a "full house sell signal," saying three of its leading indicators - bond yields, Institute for Supply Management new orders, and valuation and risk - showed it was time to sell. MarketWatch reported that analyst Teun Draaisma stated in a European strategy research report that, "Such a full house sell signal across these three indicators is rare and has occurred only five times since 1980."

Answer 1

Depending on what equities, mutual funds that you hold, it sounds like you should be fine. A 401K is a long term investment and you don’t hold equities for the short term, but for a long time horizon. You should be 80% equities until you are in you 40’s and then start to move them around.

I am a financial advisor at Merrill Lynch, and we have not said ANYTHING about selling equities. The RIC report (one of out top analysis writes the report) said that we should be buying equities. We are moving into large cap core growth stocks, trying to pull some money out of china because of the volatility, staying away from small cap growth, (buying small cap value if you can finds a value stock in small cap), health care index, industrials, and also making sure that we hedge bets.

I think that with the market volatility in the US, we will see, and have seen historically, the large cap out perform. Most, if not all firms, are still generally bullish on the markets, but with a strong hedge in place. We are moving funds around to “protect” gains if the market turns suddenly, but over all, we are still bullish. I have seen a lot of mutual fund managers going into large cap value, and not large cap growth.

However, with a 401K, you should always re-balance, to make sure you funds are never outweighed, and stick to your LONG TERM goals, and not worry about short term. Hoped that helped.

****** MORE INFORMATION***

When looking at an article like this, you need realize that the media blows everything out of proportion. When there is something good, they talk a little about it, and when something small is said, they make it seem like the world is going to end. If you invest
CORRECTLY, I think that you will be fine. Be a smart investor, and don’t “follow the crowd”.

***Something that I got from JPMorgan Case this Monday*****(meeting with a VP and regional manager)

Since the low in 2002 the S&P average stock is up 167%, the S&P index is up 98%, High beta stocks are up 264% (over 1.5), low beta stock are up 146%, dividend paying stocks are up 146% and non dividend paying stock are up 221%.

Now with that said above…..and you know what happened in 2000, 2001, and early 2002…..

52 billion people pulled money out of fixed income in 2000 (late), and 126 billion people put there money into growth stocks in late 2000……from 2000 to 2002 the markets were down over 50%.

In 2002, and 2003 (when the markets started to make this big move), the US equities had there lowest years of investor (15 years period) of 43billion, and 41 billion.

People buy at the high, and sell at the lows. The major reason why people make these moves is because of the media. I am not telling you to buy/sell, but do your due diligence.

Back to the 401K, it is long term, stocks have shown, in the long term to be very profitable. You never want to “time” the market, be a smart investor. I would never SELL, SELL, SELL the equities market. That is just dumb….

In your other accounts you can always put in stop loss orders to capture your gains, or limit losses, move to a “daily step up” variable annuity (5 year), so that you will NEVER need to worry about you downside risk. (Prudential has a great daily step up).

Bottom line is be a smart investor, and don’t believe everything you read.

Sorry it was long, I hopped that helped.

Answer 2

You look pretty well diversified now and you've got a long time till you'll be getting into your 401.

The only thing I would do differently is to move about half of your domestic into fixed income. Keep dollar cost averaging, but move half the domestic. You're correct in your thinking that the market is overpriced at this time.
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Answer 3

Market forecasts are subject to randomness and human error. IMO, for retirement investing you should ignore their forecasts and stick with your predetermined asset allocation.

Download my free book on retirement investing at
http://www.invest-for-retirement.com and go straight to chapters 16, 20, and 23. Then after reading that, if you still want to make a change then go right ahead.

You should carefully consider the consequences of actively managing your asset allocation and being wrong on the prediction. Academic studies show that the overwhelming majority of investors change their assets at precisely the wrong time and end up underperforming the market. If the professionals cannot do it correctly, what chance do you have?

In the long run, about 90% of a portfolio's return is determined by the asset allocation, much of that coming from the stock to bond ratio. Timing of your purchases and which specific funds you pick play only a very small role. I cite several studies in chapter 20 of my book.

Asset allocation determines your risk and gross return. Costs then determine how much of that gross return you retain. Market predictions, morningstar ratings, and timing of your purchases are relatively insignificant in the long run.

Also remember that when you move assets to other funds you pay the direct and hidden fees (the brokerage commissions and bid-ask spreads) on both ends. This eats into your long-term profits.

Let me give you two quotes to consider by one of the most respected authors in this field, William Bernstein.

"A young person should get down on his knees and pray for a stock market crash, so that he can purchase his retirement shares at firesale prices." - The Four Pillars of Investing

"The ability to ignore current market conditions is one of an investor's greatest weapons." - The Intelligent Asset Allocator

If you move money out of stocks when the market is sliding down, you give up the ability to purchase new shares at cheaper prices. The fact that prices have fallen only makes stocks safer, not risker.

In the long run, market crashes are not the greatest threat to an investor. Inflation is. Portfolios can recover after a crash, but inflation represents a permanent loss of purchasing power.

Consider the study by professor Seybund who found that 90% of the market's 30-year returns came from only the top 90 trading days. 90 days out of 4,500 total trading days determined almost all of the return. If you are out of the stock market during one of those critical days, you may miss a big gain. A long-term investor cannot afford to be OUT of the market.

It is an investor's DUTY to take losses from time to time and not get upset about them.

Answer 4

Your thinking is sound, but the market can surprise you. Say you move out of equities and the market continues upward? How long to you stay out? When do you get back in? Trying to "time" the market, moving in and out constantly, is hard and I think you would lose more than you would gain. Just stay in and ride it out.
Also, be aware that Merrill Lynch and other brokerages want you to move your money around as they get paid on these movements regardless of if what they suggest is right or wrong.

Answer 5

You could do that but being on 29 leave your money where it is. Dollar Cost Averaging is the best bet.