This System Can Help Investors Manage Their 401(k) in 1 Hour a Month
Retirement accounts are among the most valuable assets most people have, but limited investment options can present challenges to effective management. My 26-week rate of change (ROC) trading system was actually designed for retirement accounts and could help no matter what the options are.
Many employers offer 401(k) accounts and other retirement plans. These investments usually allow employees to allocate their investments among a small group of mutual funds. According to an industry group, the average plan offers access to 19 funds. They usually include a selection of funds investing in U.S. stocks, international stocks and U.S. bonds.
When I first decided to write a book, my target audience was the typical employee who had limited time to manage their assets but deserved a chance to beat the market. I researched a number of retirement plans and ran detailed tests to find a strategy that would beat the market, decrease risk and required less than one hour a month to manage. The results of hundreds of tests showed that these goals could be achieved with my system in almost any plan that offered at least half a dozen diversified funds.
That book, Smarter Investing in Any Economy, is now out of print and used copies are offered on Amazon.com for a couple of hundred dollars. I’ve continued updating the test results that were published in the book and the strategies continue to work.
I also post these weekly articles following the same set of rules that worked so well over so many years. The biggest difference between this weekly update and the typical 401(k) account is that I look at more than 100 ETFs to maintain the model portfolio while retirement accounts are much more restricted.
This portfolio could still be used to help any retirement investor make asset allocation decisions. We move into cash when risk becomes too high, like it has in the metal markets recently. Most retirement plans allow for the option to move to cash.
Turning to the question of what to hold in a retirement account, a well-balanced retirement portfolio should include both some stock and bond positions. Bonds are an investment many people love to hate. They might be boring when they are doing well, and they are a concern when rates are at historic lows. Their purpose in a diversified portfolio is to decrease risk and they do that even when rates are low. It is definitely possible that interest rates will be higher 10 years from now, and that means bond prices will fall, but bond funds will adapt to the slow changes that will occur in the bond market and bonds should be considered a core holding in a retirement plan.
After deciding on the right amount of bonds to own, the next question to address is what to buy. The ETFs in the model portfolio offer a guide, as does some simple analysis. Finding funds that are similar to the ones highlighted in the portfolio is one way to use this information.
For example, both a U.S. stock fund and international stock fund could be selected as options now, along with a global bond fund. Given the limited options available in most plans, that could be as close as you can come in mirroring this portfolio.
For those willing to do a little more work, the 26-week ROC indicator could be used.
26-Week ROC = (Today’s Closing Price – Closing Price 26 Weeks Ago) / Closing Price 26 Weeks Ago x 100
That’s the formula I use as the basis of this system and it is an exceptional portfolio management tool. As one example, you could calculate the indicator for each option your plan offers and invest in the three with the highest value. In testing, I discovered doing this once a month can beat a simple buy-and-hold strategy in most plans.
In the model portfolio we track at ProfitableTrading.com, there aren’t any changes this week.
The IPO of Boise Cascade Company (NYSE: BCC) this week shows that there should be more gains ahead for Guggenheim Timber (NYSE: CUT). BCC manufactures plywood and other wood products, the core products produced by the companies CUT owns. The company originally intended to price its shares at $16 to $18 but raised that to $21 after seeing strong demand. The stock jumped more than 25% on its first day, which I believe shows that our position in the timber sector should be rewarded over time.