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401(k) plans are a great way to help build for retirement. They also have special rules that must be taken into account
when implementing a trend following investment approach. 401(k) plans are designed to be used in a Buy and Hold approach
so you must know these rules before you begin.
For most employees eligible to participate in a 401(k) plan, it's a way to get instant returns on your contribution.
Most, not all, company's with 401(k) plans will offer a matching contribution to what you put in. Some company's will even
match dollar for dollar what you put in. For those who don't get math, thats a 100% return
on your investment. It's like getting FREE money. In fact, it is FREE money. Did you hear me....THATS FREE MONEY!
Now if your company is like mine, they only match 50% of what I contribute. Still, that's a 50% return and again,
FREE MONEY.
Take advantage of your company plan. This is your benefit. Use it.
Most plans have limits on contributions and limits on the match. For example, my company match is 50% of the first
6% I contribute of my gross pay. If my gross pay is $1000 and I contribute 6%, my contribution is $60. My company
will contribute $30.
My plan allows me to contribute up to 15% of my gross pay. Using the same example I would contribute $150 and the
company would contribute $30 (50% on the first 6% I contribute).
Another benefit is that a 401(k) uses pre tax dollars. That means that the tax man only gets to calculate taxes after
I contribute to the 401(k). Using the example, my taxable income would be $850 not $1000 (using the 15% contribution).
Contact your benefits office for your plans details.
What are your investment choices?
Most 401(k) plans will have a variety of investment choices. You need to find out what the investment choices are,
and how they invest.
You might have different "style" options.
Large Cap, Large Cap Growth, Large Cap Value Fund (hold stocks of "Large" companies)
Mid Cap, Mid Cap Growth, Mid Cap Value Fund (hold stocks of "Mid Size" companies)
Small Cap, Small Cap Growth, Small Cap Value Fund (hold stocks of "Small Size" companies)
S&P 500 Fund (same holdings as the S&P 500 index)
International Fund (might invest world wide excluding the US)
World Fund (might invest world wide including US)
Balanced Fund (might have both stocks and bonds)
Bond Funds
And maybe something called a Stable Value Fund. This is your "cash" position. You can identify it by it's share value
of $1.
Find out what your fund "ticker" symbols are, enter them into a chart and take a look.
FYI, your fund "ticker" symbols should be 5 letters and the last one should be X. Something like FMAGX or ALMRX or for
example.
You also need to find out what, if any, trading restrictions your choices have. Most Funds impose minimum holding periods
and charge a fee if you want to get out early. This isn't the best situation if the market starts going down like the Titanic.
Holding periods can vary from several days to several months. Fees can range from 1/2% to 5%. It's a way the funds try
to deter you from taking your money out. Hummm, its your money but they want to keep it.
You need to know what the rules are.
Dividend and Capitol Gain Distributions.
Dividend and Capitol Gain Distributions are paid to shareholders of Mutual Funds. They are paid out from once
a year to quarterly. When a distribution occures, the share price will drop by a like amount. For example, if your fund has
a distribution of $0.25 per share, the share price will drop by $0.25. Sometimes it will come as a shock to see the fund you
invest in be flat when the market had a nice up day. You need to be aware of these distributions, especially if you are tracking
the value of your holdings, and adjust your purchase price as needed.
What's this Large Cap, Small Cap and Value stuff anyway?
Large cap, Small cap, Growth, Value...bla...bla...bla.
What the heck is this. Some funny hat sizing method?
The "cap" in Large cap refers to "Market Capitalization" or what the market value of a company is.
Huh?
It's just a way for Wall Street to catagorize a company stock. It is the total dollar market value of all a companies
outstanding shares of stock. Market cap is calculated by multiplying the a company's shares outstanding by the current market
price. The investment community uses this figure to determine a company's size.
If a company has 35 million shares outstanding, each share with a market value of $100, the market captialization is
$3.5 Billion. (35,000,000 x $100).
Growth companies are those whose earnings are "expected" to grow at an above average rate relative to the market.
Value companies are those that are considered undervalued and trading lower than what their true value is.
You don't care about "market cap" or "value and "growth". These are terms thrown around by Wall Street to confuse. You
are like Al Thomas, who says:
"if it doesn't go up, don't buy it".
Really want to know about Market Cap, Growth and Value? This link will take you to the Investopedia Dictionary.
So, the market says BUY. What do we buy?
When we get a BUY signal, we want to buy what is currently doing the best. Dick Fabian's
research shows that the funds doing best at the beginning of a BUY cycle tend to keep performing
the best. Of course, there is now way to guarantee this, but it has been true in the past.
So what we want to do is look for what has been doing the best. The easiest way to do this is to compare our choices
against the market and see who is doing best. Refer back to the "What to Buy" page for more help.
Rank your funds here. Look at the 13 week return as a starting point.
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