401(k) Guidance From Warren Buffett, Jim Cramer, and TC ~ The Risk Averse Alert

Saturday, October 18, 2008

401(k) Guidance From Warren Buffett, Jim Cramer, and TC

I recently wrote an article for the Rochester Democrat & Chronicle titled, "Safety is the key to explosively growing a 401(k)." In it I outline some simple facts about retirement investing. The ideas put forward there are not your typical financial industry banter. It's quite likely you have never read anything like it.

The crux of my thinking simply is this: I believe investment risk is quantifiable. This is particularly true in the stock market.

As you can gather from my recent commentary, I believe the worst of selling in the stock market probably is over for the time being (and if it is not, then it is nearly so). Over the months ahead major stock indexes could rise upward of 30% or more.

Therefore, you ought to consider positioning your 401(k) so it is invested in the stock market.

Now, if your 401(k) presently is safely sheltered in a money-market fund, you really don't need to change a thing. I am not here to promote aggressively trading one's 401(k). Rather, I advocate risk management. Since Monsieur Market likely will be dishing out a heaping helping of pain soon enough (making the present bout appear a mere appetizer), you might just as well keep your retirement savings safely tucked away in a money-market fund.

Here's the thing. My risk-averse 401(k) investment strategy is geared toward beating the S&P 500 on a five year, rolling basis. Each quarter you could compare your 401(k)'s five-year performance to the S&P 500's performance over the same period, and I am willing to bet you will trounce this industry benchmark. This should prove extraordinarily valuable over the next five years in particular, and is likely to remain true until at least 2015.

So, if you took my advice back in May and switched your 401(k) savings to a safe money-market fund, you're good. You might consider switching a portion of your 401(k) to a posture that's invested in the stock market, or you might rather do nothing at all. It's up to you.

If, however, you did not act on my May 10, 2008 recommendation advising you park your 401(k) savings in a safe money-market fund, then listen up. Do you want a shot at making back some of the losses you have suffered this year? Then you had better get your 401(k) 100% invested in the stock market.

I know this might be a hard recommendation to swallow. Yet it is precisely times like these smart money wades into the market.

Did you see Warren Buffett's New York Times Op-Ed published on October 16th? Bear in mind Mr. Buffett confesses no knowledge about "the short-term movements of the stock market." He is looking out 5, 10, 20 years from now. That is well and good, yes. However, Jim Cramer published a thoughtful rebuttal. Essentially, he says Buffett can afford to be wrong for a time. So, that's where I come in.

As best as I can tell Mr. Buffett will look like a genius for his fortuitous timing over the months straight ahead. Then, subsequently Cramer will be the genius, as I suspect major stock indexes might collapse back to levels last seen in 1994 sometime over the next few years.

So, here's the situation. Your 401(k) has taken a big hit this year and you have a chance to make back much of what has been lost on paper. That's why I suggest you consider positioning your 401(k) so it is 100% invested in the stock market.

Diversify how ever you wish. When shooting for low-risk gains in the stock market diversification is the safest route to realizing exceptional returns.


Bear this in mind, too. I am not calling a bottom here ... I am not attempting to "time the market." Nevertheless, I believe a bottom is near. If your 401(k) is to make a reasonable recovery over the months ahead, you are well-advised, then, to come up with a plan allowing you to capitalize during the stock market's upcoming recovery ... once bottom finally is in.

Do you know which of your 401(k) plan's investment alternatives put you 100% in the stock market? If not, shoot me an e-mail and give me the following information:
  1. Your 401(k) plan's administrator (Vanguard, Fidelity, etc.)
  2. Your company's name and address

I will call your 401(k) plan administrator and determine which of your plan's investment alternatives put you 100% in the stock market. I also will learn more about your plan's safe, money-market alternative. Then, I will get back to you.

No charge.

Send your e-mail to:

Subject: 401(k) SOS

Let me conclude by saying the matter of assessing risk investing in the stock market actually is easier than you might think. E-mail me. I'll show you what I mean...

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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

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RainmanInVegas said...

The housing mess and high valued P/E of equities are not corrected yet. There is still lack of confidence with wild swings in the market. What do you see as catalyst for the stock market to move higher?

TC said...

RainMan: I will let CNBC's Matt Nesto answer your question with one highly probable eventuality in the current environment. The VW "Bug"