Where should I move my 401(k) gains before the bull stock market ends, in preparation for a market crash?
My 401(k) accounts do not have the option to automatically sell at a stop point. How do you recommend that I lock in my gains before the bull stock market ends? Is it better to move my gains into my 401(k) money market or move them into my 401(k) defensive stock option (for example, a utilities fund)?
Making investment changes based on “fear” or “greed” will typically end in failure...unless you have a very disciplined investment plan. If you lock in the gains now and move to something defensive, how will you know how and when to re-engage your portfolio allocation. Moving to a money market or fixed account will make you feel good in the short term, but most that do that (without a discipline) will end in faluure...by staying in cash and missing the next market upturn.
That being said, if you want to be able to quickly make a change, I sometimes suggest to a client to pick one of the “lifestyle https://www.investopedia.com/terms/l/lifestylefund.aspfunds” or “age-based” funds in your 401k. This will keep you diversified and allow you to move more conservative or aggressive with less mistakes...as these funds have a good compbination of stocks and bonds. You can move to a more conservative option now (and then be in one fund) and when you feel that the correction is over, you can move back to your current allocation or to a more aggressive fund with just one trade (easier)...but the real question is when and how to do it...as by the time it feels “good”, you will have most likely already missed the move.
If you are not sure what to do...and don’t have a strategy, check out some of my articles:
Here's the problem: I don't know how soon you plan to use the 401k funds. Are you 35, or 65? The answer will be wildly different in those scenarios.
At any age, rebalancing at least once per year is the right thing to do. This means putting your account back at the original percentages of stocks/bonds/alternatives that you started with. You do that to "scrape the wins" from the parts of your portfolio that did well, and reinvest them back into the underperformers. It also helps to make sure your account doesn't suffer from more volatility than you intended.
For example, let's say you were a middle-of-the-road 50/50 investor. 50% stocks and 50% bonds. With the stock market the past few years, if you didn't rebalance, your stocks might have grown to now be 60% or more of your portfolio, and your bonds would be 40% or less of the value. That growth in the value of your stocks has shifted your risk from 50/50 to 60/40. Rebalancing corrects that. If you don't rebalance, and the market drops significantly, you would have exposed 60% of your portfolio to a market drop, when you intended to expose only 50%.
Here's the other bit of advice I'll give you: if you're younger than 50, totally and completely ignore today's stock market. Just keep plowing money into your account. Stock market declines are actually very GOOD for younger investors because you're buying. And when you are buying, you want the lowest prices possible on stocks. (It's when you're 70 and living off of those stocks that you can't have a down market, because then you are a SELLER, and not a buyer.) It's completely counter-intuitive to most people, but when you are young and investing, you actually WANT times of steep market declines. Most people, however, cannot manage themselves emotionally when this happens, which is one of the primary reasons to have a financial advisor - we're trained to keep emotions out of it and to help you stay focused on the long road ahead, not on today's market volatility.
The bottom line is, not one person here, on on CNBC, or anywhere else, knows when the market will drop, or how far, or for how long. Anyone who does make those kind of claims are either deluded or liars. To try to guess when it will happen will drive you crazy. Just pick the appropriate allocation for a several year period and get out of your money's way. :)
Best wishes to you!
In case you hadn't noticed the repeating refrain from all the other advisors answering this question, I will repeat: you can't time the market effectively. Oh, you might get lucky, sure. You might sell at the peak through a stroke of luck. But I bet you won't be able to get back in at the right time. In all likelihood the panic and fear that will be prevalent in the news as a result of any crash will leave you paralized. And while everyone sits and nurses their precious horde of cash, the market will quietly turn and begin its next bull run, leaving you on the sidelines.
It is no secret why so many advisors repeat the same advice. It is the voice of experience. Most of us have tried the timing game (utterly sure of ourselves) and found it impossible to win. We look at which of our clients are successful, and it is inevitably those who made regular contributions to their investment account, left it alone, and ignored the gyrations of the market. Look at those who are successful and emulate them.
What a great question and one that crosses peoples minds a lot. I will say that you are thinking a little differently in that most people want to go to cash AFTER the market has sold off.
Each investor is different and without knowing your age, time horizon, risk profile, etc it is difficult to give a precise recommendation, however I will answer in the broadest sense and hope it helps. I tell clients to look at their accounts with a certain objective in mind such as capital appreciation, capital preservation, or current income. Usually for a 401k, the objective is capital apprecaition in order to maximize account value for when you are ready to retire, at which time your objective will change towards income. Additionally, because of the long term nature of the account (taxes +10% penalty for early withdrawal) combined with contributions that are the best form of dollar cost averaging, a 401k should be used as a more passive investment. Trying to time the market and make binary (you either win or lose) active bets will most likely cause your portfolio to suffer in the long run.
With that being said, it is a great idea to periodically rebalance the portfolio. Depending on what is offered in your plan, there will inevitably be funds that have done extremely well and others that have not. By selling some of the strong performing funds and buying some of the weaker performing funds you can increase the expected return of your portfolio over the long term. I stress "long term" because it may take awhile to realize the benefit of rebalancing as momentum tends to stay in asset classes for longer than most people expect.
Given your current views, in the process of the rebalancing you can assess what would have an outsized exposure to a downturn in both stocks and bonds, such as high yield bonds, corporate bonds, and growth stocks and reduce your exposure there. As an example, even though a high yield bond is fixed income, if we were to go into a bear market, this asset class will most likely behave more like a stock than a bond and thus defeats the main goal of diversification. Additionally, there is nothing wrong with using cash as part of the allocation in your rebalance, it just should not be an all or none proposal like the question states. After all, if the fed continues to raise interest rates 3-5 times over the next year, that cash can become more valuable when other fixed income securities may not.
Best Wishes and happy investing!
This question seems to assume some advance knoweldge of the market which, honestly, none of us has. As difficult as it may sometimes be, it is a good time to stop and reflect on this and understand how much stress and uncertainty you may invite into your life by trying to time the market.
A more productive activity at this point would be to review your long-term financial plan and ensure you're taking the appropriate amount of risk in view of your longer term goals. It will likely bring far more clarity to your current circumstances than attempting to move your investment portfolio around in ways which may, frankly trigger unintended consequences all of thier own.
John McNertney, CFP®