The Economy, Markets, and Your 401(K) Portfolio, Pt. 1 of 4

In the inaugural edition of our newsletter, The Wealthcare Inbox, we are looking at your 401(K) Plan, and how your investment choices should never be made in a vacuum without understanding how economic cycles work, discerning where the economy is today and where it may be heading. #thewealthcareinbox #401k #investing #retirementplanning #economy

Perhaps life would be a lot easier if we understood how money works within the scope of stock market investing by the time we graduated college, and/or began our professional careers. The lack of knowledge about investments among working professionals creates a challenge for many employers that sponsor a retirement plan (e.g., 401K, 403B) for their employees.

On one hand, offering a defined contribution plan such as a 401(K) relieves the burden of the employer having to financially foot the retirement bill for their employees, which is a good thing. However, it is not such a good thing when employees are tasked with needing to know which investment (Mutual Funds, Exchange-Traded Funds, etc.) is suitable for their retirement portfolio. This inadvertently exposes the employer to fiduciary liability, since they're the ones offering the investments to the employee. It isn't sufficient to know about mutual funds, exchange-traded funds, stocks and bonds. It is important to understand how those various investment vehicles (which I will refer to as "asset classes) should be paired together to create the optimum risk-adjusted returns for an individual investor.

Furthermore, to understand the proper pairing of asset classes, we first need to take a few steps back and consider that those investments are directly affected by the "cycle" of the economy: Expansion, Peak, Recession, Trough, and Recovery, including an important outlier called Event Risk. This is very important because for the person who looks at the investment choices provided within their 401(K) and makes his/her selections based on the positive performance or worse, the recommendation of a co-worker, they wouldn't know whether selecting a particular investment is well-timed based on where the economy is and more importantly, where it is heading!

Case in point, consider the employee who invested in funds that resemble the performance of the Standard and Poors 500 on the following dates:

  • January 1, 2000 - Three months before the "Y2K Recession"
  • January 1, 2007 - One month before the start of the Great Recession
  • January 1, 2020 - One Month before the coronavirus pandemic

The result was a not-so-fun slide downward until the market found its new bottom. Could this have been avoided? With knowledge of how the economy works, it is possible; and at the very least it can be mitigated, which is more realistic than being able to correctly predict the exact day, month, or quarter when the economy is going to take a turn for the worse.

What I Want You to Learn

Having worked as a financial advisor managing investment portfolios for hundreds of individuals over the past 30 years, I have learned a thing or two about the seasons of the economy, and its subsequent and impact on the markets. A general rule, the economy tends to telegraph itself, which in a sense demystifies it somewhat, and the market, while its behavior is less predictable on a day-to-day basis, tends to confirm where the economy is at the moment, including its direction. Or, as Wall Street Analysts like to say, "the markets are forward-looking."

In this series on retirement plan investing, my goal is for you to gain a better understanding of economic cycles, how to discern which cycle the economy is in, and to identify which asset class (within that long laundry list of investment choices in your 401K Plan) are likely to perform best, and how to pair them to achieve a rate of return that is suitable for your risk tolerance.

If you have questions, or would like to schedule a meeting by phone or Zoom, the following button will allow you to book a time on my calendar that is convenient for both of us.

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In Pt. 2 of our next edition of "The Economy, Markets and Your 401(K) Portfolio", we will look at the economic cycles,

the meaning of each cycle, how they are influenced, and its impact on specific asset classes that may be within your 401(K) Plan. Lastly, please share our LinkedIn company page and newsletter, The Wealthcare Inbox with family, friends, and colleagues.