If you check your 401(k) statement anytime soon you should feel much better than you did a year ago. Your investments are doing well.
But why? Bad news and uncertainty are everywhere: Trade wars, impeachment, flat corporate earnings and a looming presidential election. Add to that muddy mix a slowdown in global growth and central banks worldwide cutting interest rates to shore up sluggish economies.
Our Federal Reserve is also cutting. Since July, the central bank has trimmed rates three times, bringing the federal funds rate down to a range of 1.5%-1.75%. And that’s been good for stocks and bonds. The Standard & Poor’s 500 stock index is up over 20% this year and the Bloomberg Barclays US Aggregate Bond Index is up 8.3% year-to-date.
In short, interest rates matter to both bond and stock performance. Look at history. Back in 1995, the Fed also cut rates three times. What was the result? Those cuts reignited the economy and generated a cumulative total return for the S&P 500 of 251% over the subsequent five-year period.
With that encouraging precedent in mind, now’s a good time to look over your 401(k) and consider these tips for your stock and bond holdings.
Don’t let the market decide for you
Because 401(k) balances are tax-exempt, you have the luxury of adjusting your investments without worrying about taxes. If a particular fund or asset class has grown to an outsized percentage of your holdings, sell those holdings and reinvest the money elsewhere. By not trimming, you run the risk of riding an investment up and back down. Cashing in on your gains, even if you do it early, is prudent and results in a portfolio that reflects your desired allocation and risk tolerance.
Don’t get into weeds on Fed, politics
By the time most investors have enough information to make a change to their portfolio, the market has already reacted and it is too late. The fund manager in your chosen 401(k) investment should be analyzing and anticipating and generating excess return for you. If he or she is not (over a reasonable period) pick another fund. Your job is to keep your allocation in line with your risk tolerance.
Don’t time the market
Whatever you do, don’t try to time the market. While tempting, it almost always costs investors total return and generates significant underperformance. Manage your asset allocation to your objectives and remember that the beauty of a 401(k) is you are dollar-cost averaging by taking money from your paycheck every two weeks and putting it to work in markets. If you are unwilling to manage your allocations and would rather invest in a target-date fund, that is up to you. But you are surrendering the most important control — how much am I comfortable owning in stocks and how much in bonds?
The more engaged you are in managing your money, the better shape you will be in when you finally retire. In the meantime, you can thank the Fed, instead of your lucky stars. So far this year is a doozy.