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Is there a time when it is considered prudent to try and lock in the profits you have made in your 401k?
I am a believer in efficient markets and rely on dollar cost averaging when it comes to my investments. I also recently learned that my risk tolerance wasn't quite as high as I might have thought it was due to the recession.
I was smart and left my money alone through the recession, if you listen to the experts. Now that I am hearing news of a possible bubble in the S&P 500 and I am curious if I should lock in my profits for the year?
I have earned 27% which I would be happy to say I kept for the year. Should I create a stop loss at 25%?
How does an investor with a 401k preserve what they have made without necessarily trying to time the market.
Right now, I am staying the course and leaving it alone. I am well distributed and balanced, but I am really nervous that things are overheated again.
I am not a "Financial Planner", certified or otherwise. I have consulted when some in the past and even the BEST ones did not seem to really have as much insight into the strategies that I believe ARE needed to look at both the "long run" of all investment data AND the skepticism to know that times CHANGE all the time. You could devote your life to esoteric strategies (and some folks have, going so far as to write VOLUMES on the subject) but somehow I doubt that is what you are after!
It is NOT THAT HARD to make SOME effort to IGNORE THE TV! Stick to a CALENDAR. I say this because I personally I have seen both some GREAT times in the markets and some HORRIBLE times and they often occur VERY close in time. That said there are strategies that I have used that I think others can.
First, the 'rules' about market timing are in direct conflict with the rules about rebalancing one's portfolio. You have GOT to spend some time realizing that there ARE some definite triggers to be aware of or you WILL lose money. Even if you have a VERY broad index fund there are still periods where such funds TEND to move up or down with others moving in/out, thus it makes sense to try and rebalance not by moving all at once but by redirecting new money (in a dollar cost averaging way) OR by working with the 'technical analysis types' that will supply data on when the historic moves (some of which are influenced by things like ex-dividend dates...) are more likely and THEN sticking with the charts.
That is simple enough by itself -- if your stock holdings make up more of your 401K in a quarter or a year or whatever than your "goal for your age" should be you CAN rebalance in a smart way.
Much harder is to isolate yourself from ups & downs. In theory, if your 401k (or IRA) has true "self directed brokerage" features you COULD employ a bracket strategy with ALL your holdings. Plan Ahead With Bracket Orders Not many retirement accounts have those features. Even FEWER give you access to options contracts, but THAT was the historic basis of such instruments. Schwab Active Trading: Options Trading - Options Trading in IRAs * The problem is that you basically have to be a full time 'market watcher' to understand when to use such a sophisticated strategy AND have an intimate knowledge of details of moving out of regular mutual funds and into either ETFs or individual stocks -- not something that works for a lot of people...
What CAN work is to break up your TOTAL investment "portfolio" into various categories that can be treated as "at risk" and "investment grade" and simple move back and forth with the "at risk" portion and sweep the profits of this into "investment grade" portion. When you look at any period that your "at risk" portion is up MORE than the historic averages for a given period (I tend to like quarterly, but others make a good case for bi-monthly, I think monthly is too much...) you could sweep that into your "investment grade" holding in bond /fixed income funds. Of course there is NO FREE RIDE and if you are also not tough enough to 'replenish' the "at risk" portion from the "investment grade" portion when you are DOWN you would eventually have WAY TOO MUCH in fixed income / bonds.
To "blunt the pain" I try to overweight my active 401k contributions when the LONGER periods(200 day moving average) for the S&P 500 are below the historic averages (supercharging dollar cost averaging) and then shift toward fixed income are above (to soften the fall...). I am not religious about this, and sometimes I am out of town or just too busy to catch the emails alerts that I set up for the 'trading alerts', and I know the historic data says "miss a day, maybe miss ALOT" but as I don't put money in every day (pay check cycle for me is 26 a year...) I don't think I do too bad...
Thanks for your detailed reply. I think I am following simple, prudent investment strategies and I am really just thinking about taking a portion my money (50%) out of the stock market temporarily into bonds for a while.
That constitutes market timing, I know, but I am very concerned about our financial sector, a second housing bubble, the declining dollar and a fools rally.
I recently read an article highlighting the supposed "fools rally" back in May also, but I stayed the course.
I think I will talk to a qualified advisor, but keep the opinions coming!
If you are not able to sleep at night worrying about your 401K then you should definitely lock in the profits. Likewise, if you need the money within 5 years or so, then definitely lock in the profits. However, if your time horizon is over 10 years, you should definitely leave it alone. It is impossible to market time. Everyone is calling for a second housing bubble and another crash to the financial sector, etc. However, there were many that were predicting Dow 3000 and a wholesale collapse of the economy and that never happened. So, it is useless to try to worry about it and just focus on your long-term timetable and your comfort in being in the stock market.
That constitutes market timing, I know, but I am very concerned about our financial sector, a second housing bubble, the declining dollar and a fools rally.
The part that worries me about the market right now is that we're starting to see big swings up and down just like we did when the market took a dive.
Follow Warren Buffet's words. "Be greedy when others are fearful, and fearful when others are greedy."
That's right. Do what you have too, but if this market does take another dive (and I don't think it will happen), then up your contribution percentage and buy more!
That's right. Do what you have too, but if this market does take another dive (and I don't think it will happen), then up your contribution percentage and buy more!
I am already saving 20% of my income. I am definitely going to open a Roth Ira in the near future and only contribute the percentage my employer matches in the 401k.
I think I will leave things alone. I have a long horizon (35 years) to wait things out, but I am concerned about all the funny money that has been piped into the system. I am concerned that we haven't seen a true bottom.
I am concerned about another "lost decade" for stocks given the way the government spends our money.
#1: Using your 401(k) is NOT the place to try and "lock in profits" ... that's what a margin account is for, and see my other post here for some advice: https://www.city-data.com/forum/10721092-post5.html
First rule of 401(k) investing is to NOT switch your portfolio around like you would a margin account with your own non-retirement and non-essentials money. Well OK it is ALL essential, but you know waht I mean.
#2: I do think that the market is overpriced and now that the Fed will be rolling back the market interventions they put in, expect to see a "gradual" sell-off.
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