Author Topic: Reduce risk in 401k?  (Read 4449 times)

moosejaw

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Reduce risk in 401k?
« on: September 07, 2016, 09:26:18 AM »
Hi all,

My main retirement vehicle is my work's American Funds 401k.  There are a number of things that I am unhappy with about it, but it appears I am stuck with it for the next while.

With my growing concerns of a market correction I would love an option to limit my risk, go all cash, or switch to an American Fund that may perform better if a correction occurs.  Is this even possible?

I am asking here vs. calling my financial planning "expert" since I already know he will give me a speech about timing the market.

thd7t

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Re: Reduce risk in 401k?
« Reply #1 on: September 07, 2016, 10:30:27 AM »
Well, a speech about market timing is the best answer, but to answer your specific question, all 401ks have a money market option. It's close to cash and typically has around a 1% return, these days.

I am sorry you are stuck in American Funds. I have had them and they weren't great.

Seriously, you should not try to time the market. It's a losing strategy.

Edit to correct terminology.
« Last Edit: September 07, 2016, 07:06:23 PM by thd7t »

TexasRunner

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Re: Reduce risk in 401k?
« Reply #2 on: September 07, 2016, 11:40:33 AM »
Don't time the market.

That being said there is usually a money market that returns below inflation.  You will lose money while you are waiting, you can miss out on solid gains and it is proven to be a losing method unless you are in the top 20% of investors with critical market information.

Again, don't time the market.  Ride it down and pump as much money in as you can while its down.  That is a winning strategy.

(If you are right at FIRE and retirement, consider ROTH pipeline and using bonds for capital preservation.  Other people will be able to put in a lot more info about this than I can).

Polish_Hammer

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Re: Reduce risk in 401k?
« Reply #3 on: September 07, 2016, 12:14:21 PM »
I will be contrarian and unpopular. don't time the market is the soundest advice but...... I moved all my 401k an Ira monies out of stocks an into money markets yesterday and will keep it there until after the election and/or a 10% correction.  I am willing to forgo any gains that may occur during that period because I feel the risk vs reward is unbalanced at this point.   Too much uncertainty: outcome of election, will fed raise rates, etc.

johnny847

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Re: Reduce risk in 401k?
« Reply #4 on: September 07, 2016, 12:20:05 PM »
I will be contrarian and unpopular. don't time the market is the soundest advice but...... I moved all my 401k an Ira monies out of stocks an into money markets yesterday and will keep it there until after the election and/or a 10% correction.  I am willing to forgo any gains that may occur during that period because I feel the risk vs reward is unbalanced at this point.   Too much uncertainty: outcome of election, will fed raise rates, etc.

I see this kind of comment all the time. "I don't believe in market timing but....I think this time is an exception!"

The cognitive dissonance is unreal.


OP, just stay the course.

tonysemail

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Re: Reduce risk in 401k?
« Reply #5 on: September 07, 2016, 12:34:11 PM »
this is a really good lesson for you.
recognize that your anxiety will recur again and again, every time the market peaks.
take the corrective actions NOW so you can sleep better.

Do you have an IPS?  If not, then it's time to write one.
If you're uncomfortable with your market exposure, then adjust your asset allocation.
There should be a balance between short term and long term risk.

Proud Foot

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Re: Reduce risk in 401k?
« Reply #6 on: September 07, 2016, 02:43:21 PM »

Not familiar with what American Funds offers but if they have a S&P 500 or total market index you could move to one of those, if you aren't already investing in them or to a bond index.  The questions I would want to know are why do you have growing concerns of a market correction and what risk are you trying to limit? In the event of a correction your contributions will purchase more shares and can have a big compounding effect once the market rebounds.

randymarsh

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Re: Reduce risk in 401k?
« Reply #7 on: September 07, 2016, 02:47:40 PM »
Well, a speech about market timing is the best answer, but to answer your specific question, all 401ks have a "safe harbor" money market option. It's close to cash and typically has around a 1% return, these days.

I am sorry you are stuck in American Funds. I have had them and they weren't great.

Seriously, you should not try to time the market. It's a losing strategy.

Money market is correct, but the term safe harbor in reference to 401k plans is something different. Safe harbor plans meet IRS rules that remove certain restrictions non-safe harbor plans have to follow.

CheapskateWife

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Re: Reduce risk in 401k?
« Reply #8 on: September 07, 2016, 02:52:33 PM »
I guess I would be looking at how to get your $ out of American funds and into something with lower management fees.  Does your 401K allow rollovers into tIRA's outside of the company (like perhaps at Vanguard) while you are still employed?

Cycling Stache

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Re: Reduce risk in 401k?
« Reply #9 on: September 07, 2016, 02:58:18 PM »
I will be contrarian and unpopular. don't time the market is the soundest advice but...... I moved all my 401k an Ira monies out of stocks an into money markets yesterday and will keep it there until after the election and/or a 10% correction.  I am willing to forgo any gains that may occur during that period because I feel the risk vs reward is unbalanced at this point.   Too much uncertainty: outcome of election, will fed raise rates, etc.

Terrible idea.  The market is going to drop 70% minimum, so you're going to take a 60% loss.  Hold out.

Or consider why you think 10% is the magic number?  Was 10% the magic number 3 months ago, 6 months ago, 1 year ago, 2 years ago, 5 years ago, etc.?  We've had over a 200% increase in the market since February 2009.  Does a 190% increase seem more fundamentally sound, and then ready to get back in?

I get the concern, but sometimes you've really got to logic these things out.  Human behavior is a problem that way.  And I'm not picking on you in particular, just highlighting some of the flaws in the reasoning that many here suffer from--because they're human.

If you're not sure, think about how confidently you're going to move all 100% of your portfolio back in on a 10% drop.  Or do you think maybe you'll consider "dollar cost averaging" and seeing where the market goes from there.  If so, you can see how quickly market timing behavior devolves into just guessing.

MDM

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Re: Reduce risk in 401k?
« Reply #10 on: September 07, 2016, 05:48:11 PM »

TexasRunner

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Re: Reduce risk in 401k?
« Reply #11 on: September 07, 2016, 05:59:39 PM »
See also Selling all equities, discuss why I'm wrong. :) - Bogleheads.org and What if You Only Invested at Market Peaks?

Draw your own conclusions....

I like that Bob article.  I'll be sending that to my brother shortly.  Thanks!

MustacheAndaHalf

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Re: Reduce risk in 401k?
« Reply #12 on: September 07, 2016, 11:45:52 PM »
"... my growing concerns of a market correction ..."

That's opinion, not information.  You know what I plan to do with your emotional reaction?  Nothing.  And feel free to do the same when someone else passes along their emotional reaction.

A more useful exercise is to scour your retirement expenses.  American Funds tend to have over 0.50% expenses, while Vanguard funds tend to have under 0.50% expense ratios.  Does your 401(k) match contributions?  If you're in bad funds with no reward, consider contributing $0 to your 401(k) and instead contributing to a Tradtional IRA (or Roth IRA).  Better selection of funds is important when expenses are high.

moosejaw

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Re: Reduce risk in 401k?
« Reply #13 on: September 12, 2016, 06:08:44 PM »
Great advice.  I recognize that timing the market isn't a great idea, but sitting on the sidelines waiting for a 20-30% discount can't be all bad can it?

I have noticed that there are money market and bond options i could transfer to if I got really nervous.

Yes American Fund fees are atrocious and I do want to switch ASAP, but the short term cost seems quite high to switch to Vanguard.  In spite of it being my money, and my employees money as well(they are investors) it will involve an uncomfortable conversation etc etc etc with the money guy who put us into these plans.

I attempted to make this process happen to Vanguard a few years ago and got stuck somewhere pulling the trigger.

Classical_Liberal

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Re: Reduce risk in 401k?
« Reply #14 on: September 12, 2016, 06:25:21 PM »
Great advice.  I recognize that timing the market isn't a great idea, but sitting on the sidelines waiting for a 20-30% discount can't be all bad can it?

I have noticed that there are money market and bond options i could transfer to if I got really nervous.

Yes American Fund fees are atrocious and I do want to switch ASAP, but the short term cost seems quite high to switch to Vanguard.  In spite of it being my money, and my employees money as well(they are investors) it will involve an uncomfortable conversation etc etc etc with the money guy who put us into these plans.

I attempted to make this process happen to Vanguard a few years ago and got stuck somewhere pulling the trigger.

You have two issues here:
  • You have shitty funds in your 401K
  • You are not comfortable with your asset allocation

Speaking towards the first, I assume the funds are frontloaded (like most american funds).  Depending on your tax situation, contribution amounts, etc, you may be better off contributing only up to the employer match in the 401K.  However, in most cases you are still better off by paying the stupid front loads and taking advantage of the tax break.  Each situation is unique.

Take heart though!  Lawsuits are already flying at many financial companies because of these poor investment options that are obviously creating profits for your company.  You may see some changes in the near future.

Regarding number 2, you are "nervous".  Despite the prevailing attitude in this forum, the "suck it up buttercup" attitude towards equity volatility doesn't work for everyone.  It has the potential to be  counter productive in drawdowns (sequence risk) and definitely hinders your ability to make sounds decisions regarding your stash.  I would suggest you do your due diligence regarding asset allocations that better suit your risk tolerance (hint: there are more options than VTI).  Then you can be confident with your investments and stop all of this worrying about market crashes.

moosejaw

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Re: Reduce risk in 401k?
« Reply #15 on: September 12, 2016, 06:52:28 PM »
You make this sound so easy.

ysette9

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Re: Reduce risk in 401k?
« Reply #16 on: September 15, 2016, 03:20:05 PM »
In my case that best way to insulate myself from the emotional roller coaster of market volatility is to first educate myself like mad (Bogleheads wiki, Vanguard white papers, this forum, Bogleheads forum). The more I know the more I can put the swings into context. The unknown is very scary so do deliberate actions to make this less unknown and less scary.

The other thing I used to do to insulate from the panic attacks was to simply not look at my balances. Once I put in the homework and set my investments ok automatic pilot, I just spent my time and energy on something else. This got me through the 2007-2008 downturn with merely a "hmm, bummer about my balance" but no other reaction.