Your 401(k) Investments and the IGVSI
Smack, right up alongside the head. Your 401(k) investment program
deteriorated rapidly as the stock market and the economy weakened. Who
would have thought that there was so much risk of loss in those mutual
funds, and ETFs? Fortunately, the pain is most often temporary, but the
timing of the recovery could alter some participant retirement schedules
and benefits--- not to mention the hefty confiscation level retirees can
count on from Uncle Sam.
The popularity of self-directed 401(k) benefit
plans is understandable. Employees typically get an instant profit from
generous employer matching contributions, a variety of investment
products to choose from, and portability between jobs. But the benefit
to employers is far greater--- an easy, low-cost, employee benefit plan
with virtually no responsibility for the safety of the investments, and no
lifetime commitment to benefit payments. In some instances though,
employees are required to invest too large a portion of their account in
company stock--- a situation that has caused major problems in the past
(Enron, for example).
401(k) plans have virtually replaced the private
pension system, and in the process, have transferred total investment
responsibility from trustee caliber professionals to hundreds of millions
of investment amateurs. Employees get little professional guidance with
regard to selecting an appropriate mix of investment vehicles from the
glossies provided by 401(k) fund providers. Few Employee Benefit
Department counselors have degrees (or hands-on experience) in economics,
investing, or financial planning, and wind up using the "unbiased"
counseling services of the funds' salespersons. How convenient for
them. Interestingly, most salespersons also have no hands-on investment
experience either--- go figure.
Similarly, the financial planning and
accounting communities seem to have little concern about such basic
investment tenets as QDI (quality, diversification, and income). If they
did, there would never be instances where individual investors lose
everything in their one fund, one stock, or one-property investment
programs. QDI is the fire insurance policy of the investment plan, but few
401(k) participants hear about anything beyond: past market value
performance numbers, future performance projections, and the like. They are
not generally aware of the risks inherent in their investment
This is where an understanding of investment grade value stock
(IGVS) investing, the IGVSI and related market statistics becomes
important to 401(k) participants, company benefit departments, accountants
and other financial professionals. IGVS investing is just perfect for
long-term, regular-deposit-commitment investment programs.
we've got to get 401(k) investors to understand the framework of an
investment/retirement program and, then, we have to get participants and/or
their professional advisors to look inside the products being offered. As
much as I hate the idea of one-size-fits-all investment products, they are
generally accepted as the best way to deal with larger employer 401(k)
programs--- most employers don't even know that more personalized
Only when some form of company, sector, or economy melt
down occurs, does the head scratching (and the investigating) begin.
401(k) participants need to understand that they are not immune to the
vagaries of market, economic, and interest rate cycles. Along with
their employee benefit plan comes total responsibility for the
long-term performance of the investment/retirement program. Are you in
Historically, IGV stocks fluctuate enough (both in
general and by sector) to allow for mutual fund and ETF investors to select
the less risky offerings from among the 401(k) product menu at the most
advantageous times--- but all individual investors need to learn how to
identify the risks and to learn how to deal with them. Typically, 401(k)
participants buy the higher priced, last-year-best-performing, and hot
sector offerings while they sell or avoid the various products they feel
have "under performed" the market.
Nowhere else in their lives do they
adopt such a perverse strategy. And nowhere else in their thinking would
they blindly accept the premise that any one number represents what is, or
should be, going on in their personal investment portfolios. Risk
minimization begins with quality, is enhanced through diversification, and
is compounded with realized income.
The first two steps require
research, greed control, and discipline. The income part just requires
discipline, so it should be much easier to manage. If you cannot identify
and understand the individual securities within an investment product, and
assess the overall quality (economic viability and risk protection), don't
invest in it. If you have more than 5% of your portfolio in any one
individual security, or 15% in any one sector (industrial, geographical,
social, political, etc.), make some changes.
Since 401(k) plans are
almost exclusively mutual fund shopping malls, it is difficult to assess
the income or cash flow component of the risk minimization function.
Product descriptions, or your benefits representative, should provide the
answers. You can stay away from products that refuse to share the income
with you, but the best way to benefit from a fund based benefit plan is to
establish selling targets for the products you select. If your Blind Faith
Fund Unit Value rises 10%, sell all or part of it and move the proceeds to
another opportunity that is down 20%. Profit taking is the ultimate risk
So long as we are in an environment where retirement plan
income (and principal in the case of all private plans) is subject to
income taxation, 401(k) participants would be wise to establish an after
tax income portfolio invested in tax exempt securities--- or to vote more
Portfolio Management since 1979
Author of: "The Brainwashing of the American
Investor: The Book that Wall Street Does Not Want YOU to Read", and "A
Millionaire's Secret Investment Strategy"
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