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://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:
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.
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!
If you are married a very unique way to get complete control of your 401K (while still employed and under the age of 59 1/2) is to employ a QDRO - Inservice Asset Release strategy. In essence, you transfer up to 100% of the 401K into your spouses name as an IRA rollover under the authority of a properly executed QDRO (do not have to divorce to do this!). You chose the custodian to execute this tax free (penalty free) transfer into.
If you are over 59 1/2 yrs old most 401K administrators allow what is called an “inservice transfer” to any IRA custodian of your choice (tax free / penalty free). If you stay “IN” the current 401K you are going to remain exposed to the Wall Street Casino or have to move to Cash positions with very little growth.
Look into “active, tactically managed accounts” available through Registered Investment Advisors (and their Investment Advisor Reps). These accounts utilize strategies for preservation and growth that are very different than the traditional “Buy and Hold, Asset Allocation, Modern Portfolio Theory” that continues to be preached by the Brokerage community. These Active, Tactical strategies are flat fee accounts that have excellent (steady) growth records .... not the Roller Coaster of the “Buy and Hold” philosophy.
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®