As anyone with a 401(k) knows, you've got two things you can do with it in terms of investing: you can "allocate" and your can "contribute." When you "contribute," you're basically having a portion of your paycheck taken out and stuck in a fund (usually broad market based) every other week and there is basically no rhyme or reason as to your entry. You "buy" a position in the fund you designate without regard to how high or low it is on the day your contribution is credited to the account. Unfortunately, you can do virtually nothing with the timing of your "contribution."
However, you are able to "time" your "allocations" should you choose to do so. Not everyone bothers; they just "contribute" a set amount that is distributed among the funds they select in designated percentages every paycheck. They may tweak it from time to time to get it to that 60/40 or 70/30 equity-to-bond ratio that all the financial "experts" we pay the big bucks to have been advising us to do since time immemorial. For some investors who just don't want to watch the market, don't know enough about it, or aren't comfortable with monkeying around with their allocations on a more than quarterly basis, this is probably fine
My two cents, however, is that investors who are making these kinds of "blind" allocations into broad equity market instruments without regard, really, to where the market is at are probably pissing away opportunities to allocate at lower prices and are potentially taking relatively "pricey" positions in a fairly sideways market that has basically gone nowhere since late 2014. Put another way, these "blind contribution" investors have been repeatedly taking positions in the market "at the top of the key" relative to the market's trajectory since 2009, which, last time I checked, is generally not the best place to buy.
With these things in mind, here are some basic rules I'm following with respect to my 401(k) allocations and contributions in an attempt to be smarter about where funds go and when:
1. Adjust your contributions so that they are 100% to what most closely approximates a cash position in your 401(k). In my case, this is to a "fixed income" fund; it doesn't make a whole lot of money, but it largely doesn't lose money either.
2. Make allocations to broad equity market funds on dips, rather than "blindly" allocating every paycheck.
3. Keep allocations small. This might be a dip, but some dips get "dippier." My general rule of thumb is to make an allocation of 5% of what is in my "cash" position at a time.
4. Develop a simple "signal" for when you might want to move funds from your "cash" fund to a broad market fund or chart out the levels at which you'd want to make a move.
Because I look at my 401(k) as a "large time frame" account, I look for dips using the weekly chart and am largely a very patient guy as to when I want to move funds. Here, my eyes are currently on the .236 from the 10/2014 low to the 2016 high or 190 (which is fairly coincident with the Weekly 200 EMA).**
So, this isn't the dip I'm looking for to move funds from my 401(k) "cash" funds into broad market funds ... . Yet.
* -- I use the same basic rules with my IRA, although I'm offered more flexibility there in terms of fund availability and the nature of the "cash option" which, is, for all practical purposes, "cash."
** -- Noted on the chart are all allocations to a broad market fund since 2011. Up until August 2014, they were all made on touches/breaks of the Weekly 50 EMA. After the August 2015 meltdown, I'm looking at this as long-term rangebound/sideways between 182 and 220 and am more keen on adding at the low end of this range as opposed to using the 50 EMA, which SPY has already broken).
However, you are able to "time" your "allocations" should you choose to do so. Not everyone bothers; they just "contribute" a set amount that is distributed among the funds they select in designated percentages every paycheck. They may tweak it from time to time to get it to that 60/40 or 70/30 equity-to-bond ratio that all the financial "experts" we pay the big bucks to have been advising us to do since time immemorial. For some investors who just don't want to watch the market, don't know enough about it, or aren't comfortable with monkeying around with their allocations on a more than quarterly basis, this is probably fine
My two cents, however, is that investors who are making these kinds of "blind" allocations into broad equity market instruments without regard, really, to where the market is at are probably pissing away opportunities to allocate at lower prices and are potentially taking relatively "pricey" positions in a fairly sideways market that has basically gone nowhere since late 2014. Put another way, these "blind contribution" investors have been repeatedly taking positions in the market "at the top of the key" relative to the market's trajectory since 2009, which, last time I checked, is generally not the best place to buy.
With these things in mind, here are some basic rules I'm following with respect to my 401(k) allocations and contributions in an attempt to be smarter about where funds go and when:
1. Adjust your contributions so that they are 100% to what most closely approximates a cash position in your 401(k). In my case, this is to a "fixed income" fund; it doesn't make a whole lot of money, but it largely doesn't lose money either.
2. Make allocations to broad equity market funds on dips, rather than "blindly" allocating every paycheck.
3. Keep allocations small. This might be a dip, but some dips get "dippier." My general rule of thumb is to make an allocation of 5% of what is in my "cash" position at a time.
4. Develop a simple "signal" for when you might want to move funds from your "cash" fund to a broad market fund or chart out the levels at which you'd want to make a move.
Because I look at my 401(k) as a "large time frame" account, I look for dips using the weekly chart and am largely a very patient guy as to when I want to move funds. Here, my eyes are currently on the .236 from the 10/2014 low to the 2016 high or 190 (which is fairly coincident with the Weekly 200 EMA).**
So, this isn't the dip I'm looking for to move funds from my 401(k) "cash" funds into broad market funds ... . Yet.
* -- I use the same basic rules with my IRA, although I'm offered more flexibility there in terms of fund availability and the nature of the "cash option" which, is, for all practical purposes, "cash."
** -- Noted on the chart are all allocations to a broad market fund since 2011. Up until August 2014, they were all made on touches/breaks of the Weekly 50 EMA. After the August 2015 meltdown, I'm looking at this as long-term rangebound/sideways between 182 and 220 and am more keen on adding at the low end of this range as opposed to using the 50 EMA, which SPY has already broken).