What To Do In Your 401(k)

Top Line: The stock market pulled back today pretty much on track and now should move a little higher again.

A "regular" reader asked a question about moving some money from cash to stocks in their 401(k). This is the time to the Update to bring the practical into the post in order to answer this question.

Before we answer this question, we should say that we are fully invested in the stock market. We purchased all of these positions in October and November and any purchases we make in the near term would have to be done by selling something to raise enough cash to buy something else. We don't like this position because we like to take advantage of new ideas. These types of flaws will be fixed the next time we sell which should be sometime around the inauguration.

Ok, let's get back to what to do if you are still in cash.

Let's take a high level look at the landscape. Since 1982, the market has generally gone up in what we fondly call a bull market. During this time the market had some major drops in order to scare the bulls but all in all there was a move toward convincing people that the stock market always comes back...and goes higher.

After more than 25 years of bull market where the Dow went from 775 to 14,000, we are now ready for a serious bear market that will last for probably another ten years. Yes, you read that right, ten more years of a bear market. What should you do?

As happened in the 25 year bull market, when there were severe drops, this ten year bear market will feature its share of sharp rallies. This is what we think is going on now because of the huge fear factor that covered the public in the past couple of months.

The stock market is going to be volatile for the next ten years which will offer many opportunities to lose money. Or, if you're thinking about the buy and hold strategy, you will lose money on that, too. We would say that you can't have a long term hold strategy and you have to be careful about trading. Oh, yes, we would recommend coming back to the Update for clues on what to do. You are the captain of your ship but if you come back here you will get unbiased opinions on the market. So, here they are...

You can start your journey on this volatile ride. We think the Dow will top in January, near the inauguration on the 20th, near 10,500 followed by a severe drop. This drop may actually try to come back down to test the November lows which would give us another fantastic buying opportunity. For you 401(k) holders that can not "short", you still don't want to hold through that drop so we would recommend buying (on pullbacks like today) and then getting back into a cash position in January. Then, buy back in as the market drops back. This will not be easy for most of you but the results will be rewarding.