How I Manage My 401k

December 5, 2012

How To

It should be no surprise to those who have been following me for quite some time that I absolutely hate the fact of someone else managing my money. I believe that no one else other than myself has my best interest at heart 100% of the time. With that said some things in life are just out of our control and the only thing we can do is manage them as best we can.

My 401k plan prohibits me from investing in individual stocks. The only choices I have are between a handful of Life Cycle Funds and 5 different index funds. I only pay attention to 2 of the index funds and here is why. One of the index funds acts as a money market account (MM index fund) earning less than 1% return annually, the other index fund is aimed at mimicking the return of the S&P 500 (SP500 index fund). Let me be clear, NEITHER of these funds are exactly what I want. If I had my way I would let my money sit in cash instead of a money market account or purchase shares in the actual S&P 500. But as I said previous sometimes you have to deal with what you have.

 

1. How I Manage My Contributions

Because I do not trust anyone else to manage my money I only contribute the maximum amount that my company is willing to match. For example, if my company is only willing to match 5% of my salary and that comes out to $3000/year then I only contribute $3000/year for a combined total of $6,000/year. A 100% return on my money instantly! You can’t beat it and if you are not doing the same you’d better have a good reason!

When allocating money in my 401k I use 2 indicators to base my decisions:

2. How I use a S&P 500 Monthly EMA:

Let be crystal clear, there is nothing magical about the established EMA. I use it simply to establish and follow a trend. When you are young you have time working for you and it is in your best interest to follow long term trends. The system is simple, so simple in fact a 3rd grader can understand and implement it. This is no scam or gimmick and I will prove it to you in a moment. At the end of every month I log into my account to check the price of the S&P 500, if the price is ABOVE the established EMA I leave my money vested in the SP 500 index fund. If the price of the S&P 500 is BELOW the established Month EMA I cash out of the SP 500 index fund and move my money into the MM index fund.

Take a look at how this strategy has worked over the past 20 years!

Market Cycle

As I said it is so simple a 3rd grader can understand it. Here is a general summary (quick glance) break down of how you would have performed:

  • 1993 – 2001: 225% Return
  • Mid 2003 – 2008: 40% Return
  • Late 2009 – Present: 33% Return (Not accounting for the whipsaws that occurred)

I apologize that I did not have time to sit down and back test this system for you and provide an example. Please don’t let that blind you from seeing the bigger picture.  Also, keep in mind that these returns DID NOT include dividends issued. The main take away for you is to FOLLOW THE TREND!!

3. How I use the Shiller PE10 Ratio

I pound my fist on the table repeatedly when explaining to family members that stocks are businesses and not just pieces of paper. The bottom line when it comes to investing is you want to own GREAT BUSINESSES and buy those businesses at DISCOUNT PRICES. Plain and simple! 

The S&P 500 consists of the “top” 500 publicly traded companies in the United States as determined by Standard & Poor. With that being said by purchasing shares in the S&P 500 you are purchasing 500 different companies. Since I am a long term investor it is wise for me ONLY to allocate NEW money when the the S&P 500 is trading at fair value or a discount.

What is a fair value for the S&P 500? I use the Shiller PE10 ratio to determine this, a Shiller PE Ratio of 15 is fair value!

  • If the Shiller PE Ratio is under 15 then I allocate my monthly deposits from my paycheck into the S&P 500 index fund.
  • If the Shiller PE Ratio is over 15 then I allocate my monthly deposits from my paycheck into the MM index fund.

It’s that simple!

Let’s take a look at how this system would have done over the past 20 years.

 

Shiller PE

Unfortunately there was only one buying opportunity within the last 20 years when the S&P 500 was trading under fair value. This is typical rarely do good businesses trade at a great value.

4. How To Put It All Together

But wait a minute Marvin… you said you put money in your SP 500 index fund when it trades above the established EMA but then turn around and say you only allocate new money to the SP 500 index fund when the S&P 500 is trading under fair value. I’M CONFUSED!!! 

I apologize for the confusion, but I had to explain both steps separately in order for you to understand their purpose. Now that we have both concepts down I am going to give you the rules one by one.

  • Rule #1: If the Shiller PE Ratio is below 15 I allocate ALL capital into the SP 500 index fund.
  • Rule #2: Rule #1 trumps everything else!
  • Rule #3: Utilize the S&P 500 established EMA method when the Shiller PE Ratio is ABOVE 15.

5. Example

“Bob” was following the S&P 500 established EMA method so he transferred his money from the SP 500 index fund into the MM index fund in January of 2008. HOWEVER in February of 2009 the Shiller PE Ratio dropped below 15. Therefore Bob transferred all of his capital from the MM index fund back into the SP 500 index fund AND allocated all new monthly contributions to the SP 500 index fund.
Whew! There you have it. This is how I manage my 401k

 

I know this requires an active approach for your 401k and far exceeds making a one time decision when you first join a company then forgetting about it. I will tell you however that it is WELL WORTH the 10 minutes a month. I’ve even made it easy on myself. In my google calendar I set up an alert that hits my inbox at the end of every month and have links to the closing price of the S&P 500 for the month as well as the link to the Shiller PE10 Ratio.

If you want to make it easy on yourself,  you can subscribe to my monthly newsletter where I monitor these indicators and give you the results.

As always ANY QUESTIONS you have please do not hesitate. If you’re feeling shy and don’t want the whole world to see your question email me: marvin@brickbybrickinvesting.com

Here’s to Our Wealth!

Subscribe To My Newsletter!

Receive my updated 401k monitor, current market conditions, & the best dividend stocks.No cost, just actionable content once a month!

48 Responses to “How I Manage My 401k”

  1. FI Fighter Says:

    Great post! I love you writing style – clear, to the point, and opinionated! It’s refreshing to read content where the author practices what they preach. The extra examples just make things crystal clear. I also try to do that in my own writing. Good stuff.

    To our wealth!

    Reply

    • Marvin Says:

      Very humbling words. Thank you very much. I try to be as transparent as possible so that I can help others and hopefully learn from them as well. To our wealth!

      Reply

  2. Dividend Monk Says:

    Good call using the Shiller P/E. Some investors do recommend approaches like this.

    In the Dividend Toolkit I outlined an approach very similar to your post here, where the portfolio allocation is dependent on the Shiller P/E (the lower the P/E, the higher the stock allocation).

    I backtested it over the prior 35 year period with a computer program, and the strategy would have mildly outperformed the S&P 500 while simultaneously being less volatile.

    Reply

    • Marvin Says:

      I’m going to do a more in depth analysis of this strategy once I am able to find a charting system that goes back more than 20 years.

      Reply

  3. John S @ Frugal Rules Says:

    I agree, great post! I like your strategy as well in regards to the 401k. At my former employer we were able to have a self-directed 401k, which I loved having. It made things much easier and of course opened up my investment choices.

    Reply

    • Marvin Says:

      I would love to have a self-directed 401k! I would conduct the majority of my trading in that account if I could and would contribute more of my paycheck to it!

      Reply

  4. Roger @ The Chicago Financial Planner Says:

    Interesting post. If you have the discipline to follow and implement this strategy fantastic. The flip side is that you may be over thinking it. Asset allocation and periodic rebalancing really does work. I have several clients who have accumulated very substantial nest eggs this way via their 401(k) (or similar retirement plan). That said, I don’t know the details of your company’s plan in terms of expenses, the exact funds, etc.

    Reply

    • Marvin Says:

      I haven’t crunched the numbers from your example but this method works for me and a couple others that I have taught. If you’re not disciplined enough to check a system every month for 10 minutes then I think we’d both agree that you have no business investing your own money.

      Reply

  5. Gareth @ Investment Road to Freedom Says:

    Hi Marvin, great article but I’m confused. So I get the rule #1 part. But as the Shiller PE Ratio is currently 21.67 we have to go to rule 3. This is where I’m a little lost. The S&P 500 price is currently above the 20 Month EMA so I should allocate all my monthly deposits from my paycheck into my S&P 500 Index and keep myself invested in the S&P 500 Index? (currently 5% of my 401k portfolio) Once it falls below the 20 month EMA I move the money to the MM index fund and make all deposits to the MM index fund. Then if it rises above I move it back depending on the Shiller PE Ratio?

    Thanks

    Reply

    • Marvin Says:

      Gareth thanks for writing in with your question. In short, YES, you are exactly right. When the Shiller PE is over 15 you default to the 20 Month EMA method. So as it stands today, yes I allocate all my 401k funds into my S&P 500 index.

      Now a little background info…

      The reason the 20 Month EMA is so useful is it establishes a trend and allows us to get in and out at appropriate times. If you are new to investing you will find that sometimes “People be crazy” and will bid up stocks to insane levels of valuation. It is actually quite frustrating for a patient investor such as myself because I refuse to send my money into the market to die. But with this method when a crash is imminent it will get us out before hand.

      The Shiller PE Ratio is a great tool when it comes to evaluating the S&P 500. I aim to get in under 15 because I am acquiring great businesses at a discount to their value. Please make no mistake it may take the market years to realize this but when it does fortunes can be made. The reason I disregard the Shiller PE Ratio when it is over 15 is because if I only put my money in the S&P 500 index when the Shiller PE Ratio was trading under 15 I would be waiting an AWFULLY long time. I would rather have my money work for me in the meantime.

      Does that help?

      Reply

  6. Martin Says:

    I am doing the exact same thing! Contributing only what my company matches and save the rest elsewhere (my ROTH IRA, Lending Club and TD account). However in my 401k I spread my contributions among large caps, small caps, high income (or whatever the name is), some cash equivalent and that’s about it. And I also hate what is offered by our 401k plan. The funds are expensive and selection poor.

    Reply

    • Marvin Says:

      Glad to hear it! It is rare to find 401k that are wonderful. Mine is awful and the fees are astronomical as well. I should actually write a letter to my HR department urging them to allow self directed 401ks.

      Reply

  7. Rising Returns Says:

    Great post – very interesting stuff. I love reading about how others manage their retirement options.

    Reply

  8. Dividend Growth Stock Investing Says:

    I’ve always been interested in using moving averages to determine when to be in and when to move money out of the market. I’ve never done it though because I take a passive approach to my 401k investing. It’s always interesting to see how other people manage their 401k’s. Interesting strategy and good luck!

    Reply

    • Marvin Says:

      Thank you! I use to take a passive approach as well but as Martin pointed out below had you of been invested in the stock market in 2000 you still wouldn’t be at break even. By taking an active approach and protecting your capital you can come out far ahead than you would have.

      Reply

  9. Darwin's Money Says:

    I just leave my 401(k) set at 100% stock index allocation. Low costs and highest beta. With decades to go until retirement, I don’t see any reason to be in bonds. And if I had a crystal ball, I’d try out some market timing, but fear I’d screw it up and regret (First, do no harm!)

    Reply

    • Martin Says:

      The problem with this (investing in stock index) is that 10 years later you may end up nowhere or even with a loss. Just look at the latest decade, S&P 500 has no gains for that period at all and when considering inflation, you are actually losing money. I believe being a bit active (selecting sectors and rebalancing at least twice a year) will produce better results.

      Reply

      • Marvin Says:

        Martin I agree. With the exception of dividend payments most people who were all in during the dot com boom in 2000 are barely at break even. It does take a little work and education but I am convinced that by taking an active role in your retirement you can ensure your financial safety.

        I have a heavy heart for the individuals within 10 years of retirement that were hit in 2001 and hit again in 2008/2009

        Reply

  10. My Money Design Says:

    Good call on using the Shiller PE10 Ratio. Not a lot of investors know or care to use this indicator.

    Reply

    • Marvin Says:

      Thank you! When I discovered the Shiller PE10 Ratio a couple years ago I wondered why nobody had mentioned it in ALL the business classes I attended in college.

      Reply

  11. Dustin Small Says:

    I am Canadian and have only had limited exposure to 401Ks before, but my company matches contributions to an RRSP account (the Canadian equivalent). RRSP’s seem to be a lot more flexible than a 401K, as I can buy any kind of investment except those that involve margin, for example selling put options. The broker that my company uses for RRSP contributions though is not a discount broker, so once a year I transfer all of my RRSP contributions to a self-directed discount RRSP account.

    Is the fact that you can’t trade in your 401K a limitation of 401Ks themselves, or is it a specific hurdle with the one you have in particular? If possible maybe look at transferring to another broker that gives you more flexibility.

    Anyway, nice article – enjoyed it.

    Reply

    • Marvin Says:

      I’m not too familiar with RRSPs but they sound similar to an IRA. I believe it is my own personal 401k plan that has the limitations, I have heard of 401k plans that let you buy individuals securities. I’m glad you likes the article, look forward you seeing you around.

      Reply

  12. Elston Says:

    Hi Marvin,

    Thanks for this article. I have one question. If my company does not directly offer the SP Index Fund, I should look for another fund that follows the general trend of SP 500? Currently I am looking at FDCAX as I see that it follows the SP 500 closely. Also when it comes time to move to a MM index fund, should I be looking for a fund that is composed primarily of bonds and fairly stable?

    Again really great article. Thanks for sharing!

    Reply

    • Marvin Says:

      Correct!

      Look for a fund that is going to mimic the SP 500 and as for the MM fund look for a fund that is going to micic a money market account. Basically a fund that lets you sit in cash. It is VERY easy to get this mixed up with a low risk bond fund and that would be a devastating mistake. The bond market is in a significant bubble and when it bursts bond funds are going to get killed.

      I’m glad I could help. Please let me know if you have any more questions.

      Reply

      • Elston Says:

        Thanks for the reply. My company offers a stable-value fund. Is this a type of fund worth considering when I need to sit in cash? It seems very similar to a money market account.

        Reply

        • Marvin Says:

          Elston I would look closely at what the fund is investing in, but from the sounds of it that does seem to be the closest thing you will get to a money market account.

          Hope this helps

          Reply

  13. Brandon Says:

    Marvin, great article and I really like this concept and think I’m going to give it a shot. So, I understand that if the Shiller PE10 is below 15, then regardless of anything else, my money should be in the SP500 fund as well as my new per paycheck allocations, correct? And this trumps everything b/c the SP500 is being traded at a good value and therefore we should get those good bargains when we can, correct? Since the Shiller PE10 for the SP500 is rarely under 15 as you mention, which means I follow the SP500 20 month EMA method most of the time, when you talk about moving money back and forth from the MM fund and SP500 index fund, are you also talking about where the per paycheck allocations go as well? I guess my question is following the EMA method, is there ever a situation where the balance of the account goes one way but the new allocations go another, or do they always move in tandem? Thanks very much and I look forward trying this strategy.

    Brandon

    Reply

    • Marvin Says:

      Thanks for stopping by Brandon.
      1. Yes if the Shiller PE10 is below 15 regardless of anything else allocate all capital into the SP500 fund.

      2. Yes, historically the S&P 500 is considered cheap when it is below the Shiller PE10 15 ratio.

      3. Yes, when transferring funds after receiving a trigger from the 20 Month EMA indicator you transfer all capital to the necessary fund including paychecks.

      4. Yes, the capital in your retirement account and your bimonthly paychecks move in Tandem.

      I hope this helps. Additionally if you want monthly updates on what actions to take subscribe to my newsletter. As always send me an email or comment if you have any other questions.

      Reply

      • Brandon Says:

        Thanks Marvin and yes I already subscribed to your newsletter. I’ve been discussing this strategy with a colleague of mine and it seems so simple and makes total sense. Essentially, never lose money and don’t ride the down curve. But, is there a tradeoff I’m missing with this strategy? Like right now my 401K money is being split 40% large cap growth, 30% mid cap growth, 20% international growth and 10% bond fund. So by only investing in the SP 500, am I missing out on potentially higher gains due to the higher risk in the mid cap and int’l funds but i suppose I also would be riding any long down periods as well? I’m just trying to understand the upside/downside to your strategy versus my current setup. I’m 33 years old for your reference so obviously not planning on retiring for another 30 years more than likely.

        Thanks again Marvin and my apologies for all the posts.

        Reply

        • Marvin Says:

          Excellent question Brandon

          This is a more specific question given a person’s options within their 401k. Every 401k plan has different options but I have found the majority have a fund that mimics the S&P 500. For your particular situation I agree one could get a little more aggressive and spread their capital around. I am working on a strategy for this that is almost finished but I am hesitant to publish because each fund is different.

          Reply

  14. Brandon Says:

    Marvin, also, where can I find the SP 500 20 month EMA figure at? Is it something that is only calculated and reported monthly or is there a way to track it on a more frequent basis?

    Thanks again for your insight!

    Reply

  15. Brandon Says:

    Marvin,
    I see in one of your other comments that you shouldn’t confuse a MM fund with a stable bond fund. In my 401K investment choices, all I have to work with is a Managed Income/Stable Value fund that returns like 1%-2% per year. It is made up of 45% US Treasury Bonds, 20% corporate bonds, 11% ABS (whatever that is), 8% US Agency, 6% MBS passthrough and some other small % items, but only .63% in cash. That’s the closest thing I have. What are your thoughts on using this fund for the periods in which would need to move out of the SP 500 fund?

    Reply

    • Marvin Says:

      Yeah this is the downside to company 401k plans you have limited options. I would advise to use that fund as it is the only option you have. I would also try to call your fund manager and see if moving into cash is a possibility.

      Reply

  16. Athomas Says:

    So as of today would you say all of your 401k should be invested in MM based on the above

    Reply

    • Marvin Says:

      Negative! Because the S&P 500 is currently trading above the 20 EMA I have all of my 401k into the S&P Index Fund.

      Reply

  17. Nancy Says:

    Great article, gonna get started managing my own money. When you move the money from S&P is that considered a trade, and you have to pay a fee for that ? Who is your broker doing the trade ? There are so many to choose from.

    Reply

    • Marvin Says:

      Hello Nancy! I applaud you for taking your financial situation seriously. In regards to brokers and fees I cannot comment specifically because your situation may be much different from mine. However, I can tell you what I do specifically and hope that can give you some guidance. When I transfer between different funds (which I haven’t had to do yet, it happens VERY RARELY) I do not incur a fee, the shares are simply sold for what they are worth that day and I use that balance to purchase shares in the other fund. Everyone’s situation will be different because company’s you numerous 401k plans. I hope this helps.

      Reply

  18. Jay Says:

    Marvin,
    so you get out when SPY is below EMA and when you get back in? When SPY is back above EMA? You wait whole month for that or at any point during the month you see SPY above EMA? THX.

    Reply

Trackbacks/Pingbacks

  1. Weekend Reading and Poll Results - December 7, 2012

    [...] How I Manage My 401(k) Marvin from Brick by Brick Investing showed how he invests in his 401(k) based on the current Shiller P/E ratio. I like this article because I provided similar reasoning and research in the Dividend Toolkit about this subject. (Read more about the Shiller P/E here.) [...]

  2. Carnival on Money Pros | Making Sense of Cents - December 16, 2012

    [...] @ Brick By Brick Investing writes How I Manage My 401k – A detailed description of how I use technical and fundamental analysis to manage my [...]

  3. The Money Mail Carnival – Seventh Edition » | - December 16, 2012

    [...] @ Brick By Brick Investing writes How I Manage My 401k – A detailed description of how I use technical and fundamental analysis to manage my [...]

  4. Carnival of Retirement - Investing Money - December 17, 2012

    [...] @ Brick By Brick Investing writes How I Manage My 401k – A detailed description of how I use technical and fundamental analysis to manage my [...]

  5. December Links: Looking Towards a New Year | Dividend Growth Stock Investing - December 27, 2012

    [...] How I Manage My 401k – Brick by Brick Investing discusses a couple tools he uses to decide how to allocate the money he is investing for retirement in his 401k.  He uses the S&P 500 20 month moving average and the Shiller PE10 ratio to determine when the market is over and undervalued and where he should be investing at the time.  This is an interesting strategy worth looking into. [...]

  6. Awesome New Year Money Advice from My Finance Blogging Friends | Write and Get Paid - December 28, 2012

    [...] @ Brick By Brick Investing writes How I Manage My 401k – A detailed description of how I utilize technical and fundamental analysis to manage my [...]

Leave a Reply

Proud Member of the Yakezie Challenge