You just saw the envelope in your mail box from your 401K plan provider, but you are dreading opening it. Maybe it is because the market has taken a beating and you didn’t sell you mutual funds or maybe it is because the market has been doing great and you sold your entire portfolio at the market bottom a year ago thinking it would go lower. Either way, you are now finding yourself hiding from an envelope Why did this happen?
First, you are not alone. More often than not investors feel that they are being whipsawed from buying near the top of a market and selling near the bottom hoping that the market will turn around. It is really a problem of incentives in the industry, as the fund companies are not going to tell you when they think the market is overheated, which happens to be the same time that most people start hearing about the market on the evening news. The same problem exists when the market is doing poorly, as everyone talks about how great it is that prices are low so they can buy more, but often the price is going only lower.
The problem is that you didn’t know when you should be in a particular fund and when it was safe to buy. While not perfect, (nothing is) this system can protect your 401K capital and your piece of mind.
1) Determine what funds you are currently invested in. Examine the statement from your plan provider to find the funds that you are invested in.
2) Determine a tracking symbol for your funds or a tracking vehicle that is similar to what you actually own (ie: S&P 500). Depending on your plan provider, a tracking symbol may not be listed. If not, search for the funds listed (by name) on your statement on a financial site (ie: Yahoo Finance or Google Finance) to find a symbol that is similar.
3) Use a chart service like Stockcharts.com to determine a 200 day moving average for each of these funds. (For investors that are not familiar with chart services, this step can be a bit tricky, but can be figured out in several minutes.) Simply enter the fund symbol and select ‘Go’ to generate a chart. The chart will appear with the symbol’s price data and a two moving average lines: red and blue. The legend on the chart should show that the red line is a 200 day moving average (MA 200) and the blue line is a 50 day moving average (MA 50). You are only going to look at the 200 day moving average (blue line). Pay attention where this line is in relation to the fund’s price, if the fund’s price is above the line it is a buy signal, if the fund’s price is below the line it is a sell signal.
4) On the first day of every month, check the charts for the funds that you own to determine what the current signals are.
5) When the signal for a given fund changes from buy to sell or sell to buy, take that action in your 401K for that fund only, as each fund will have its own signal. Keep in mind that many funds try to discourage trading by setting penalties for buy and selling the same fund within a period of 30 days, so you may have to wait a couple of extra days to avoid this penalties.
What does all of this mean? A moving average is the average price of a stock/fund over a specific number of days. Using a 200 day moving average allows you to compare the fund’s current price to its average price over the last 200 days. If the fund’s price is higher than the moving average, it is a buy signal because the price of the fund has positive momentum, because the price is rising faster than it has in the past 200 days. If the fund’s price is lower than the moving average it is a sell signal because the price of the fund has downward momentum, because the price is not rising or is falling faster than it has in the past 200 days. Selling when the price is trending down and buying when the price is trending up, preserves capital and peace of mind by, while also minimizing large declines in account value.
As always good luck.
**Always consult with a registered financial advisor if you have questions and to determine if a system like this is suitable for your investing objectives. The author assumes no personal risk for any losses.