Submitted by The Investment Shadow
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Trading The 401k Portfolio - Part I
Why bother to trade ETFs or Mutual Funds (MFs)? Is it even possible to do so in a timely manner? Can I obtain an actively "traded/managed" portfolio for my own 401k Plan?
The basic commonality of these questions is that they are rarely, if ever, asked. 401ks, you've been told, are: safer than the stock market, managed/created by professionals, lower cost, retirement programs.
Safer than the Stock Market
But are they really "safer than the stock market"? Of course not; they are the stock market. Even Target Retirement funds are mainly equity portfolios, and not in the lower risk, dividend paying, profitable companies known as Investment Grade Value Stocks.
Most 401k investment menus encourage speculation by providing varieties of capitalization, sector, commodity, and growth varietals with little emphasis on internal selection quality, diversification, or income generation. A variety of speculations does not create a "safely diversified" portfolio. More speculation = more risk.
There is little control on how much of a portfolio is invested in one fund or ETF... safety is in the inexperienced hands of plan participants, and most just don't have the time to do their homework.
So from a trading perspective, both ETFs and MFs should be traded, to take advantage of market volatility in either direction.
Managed/Created by Professionals
Both ETFs and MFs are created by professionals; ETFs are put together by professionals but never managed, either inside the 401k shell or out. All forms of ETFs contain at least three levels of speculation, as addressed in this article.
MFs have full time managers, but their decision-making capabilities are restricted by company investment committees. They may not have the kind of discretion you would like them to have when it comes to "buy", "sell", "hold" decision-making.
Investment committees may have an agenda that managers are forced to comply with, as evidenced by performance around the time of the dot-com-bubble... when the S & P 500 rode the backs of a dozen or so "hot NASDAQ ponies".
What do you think will happen when this bubbly stock market has the audacity to go down for a few months in a row? What can happen to 401k balances in the 30 days between "selection change" or "contribution switch" elections?
Unfortunately, participants are on their own.... advisors are quick to say "buy", but gun-shy when it comes to sell decisions, particularly those that involve profit taking.
And once the nest egg is lying cracked on the ground, how will you know when to restart your contribution engines? When the going gets tough, or when the market goes greedy, MF managers must do the opposite of what an independent, investor/trader would be doing.
When the mob screams SELL (typically in long-falling markets), ETF and MF prices tumble. When the same folk get greedy (at market all time highs), ETF prices soar while MF managers must continue to buy at ever higher prices.
Studies show irrefutably that MF managers rarely "beat" their market benchmarks. They can't "outperform" over a market cycle because unit holders invariably sell low and buy high. But:
· MFs and ETFs are provided by the same or similar entities. The "raison d'être" for the latter is the abject failure of the former. So why do 401k professionals populate 401k plans with MFs at all, and why do vendors still offer both products?
· In spite of their lower cost to participants, how can index ETFs possibly perform better than their MF brethren during market bubbles and crashes?
Further misguiding the process, is the tendency for managers and plan participants to buy the most popular and pricey entities and to move away from sectors and companies that have fallen from favor... thus increasing the scope, depth, and duration of the ensuing market trauma.
Sure, ETFs and MFs are created by professionals, but both become mob directed as the market cycle moves further and further, in either direction, for an extended period of time.
Click for Details --> Trading The 401k - II <--
So, from a trading perspective, since portfolio management is often in the inexperienced hands of plan participants, both ETFs and MFs should be traded within pre-set buy and sell guidelines, so that market volatility in either direction can be taken advantage of.
401k programs are not retirement, retirement income, or pension programs. Social Security is a pension program; congress and many labor unions (notably public employees) still have pension plans. Many corporate entities provide a pension benefit to their employees, or continue to make payments to retirees.
The distinction is simple, and explained pretty well in this article. 401k product vendors want to "roll the 401k" into some other form of product at retirement --- only then to start thinking about income, and how to create it in a low interest rate environment.
Retirement plans pay guaranteed income, based on the participant's recent pay level, likely adjusted for employer Social Security contributions, and possibly with COLAs; employees have no responsibility for the investment process.
401k Plans provide a variety of investment products, predominately equity based, tax incentives, and employer contributions; employees are totally responsible for the investment decisions... except in plans which require company stock owners