Congratulations on making it this far! Information on how to manage a 401(k) account from the participant's point-of-view isn't easy to find. If you want to know more about the challenges you face, this is a good start.
I'm dividing this chapter into two parts. The first is more depth on the research process. It isn't for everybody so you are welcome to skip down to the Insights below.
Our primary research tool is Point-and-Figure (PnF) charting. It's a school of technical analysis. Basically, it is a study of supply and demand in financial markets. The services we use compare the price movements of 22,000 (and counting) investments worldwide trying to find which of them are currently stronger than others and if that strength forms a pattern we can use to make investment decisions.
In the initial stages, I really don't care what a company does, earns, owes or makes. All I want to know is whether the price is rising or falling relative to the rest. Investments are also classified by sector, industry, country and asset class so those are all graded by their relative strength too.
What makes this so different than the packaged investment products that make up so much of the US market is that we don't have preset allocations for stocks or bonds or anything else. Markets tell us where money is flowing first.
This chart divides price of the Dow Jones Industrial Average by the price of the New York Stock Exchange 5-year Treasury Index.
When the Dow is rising relative to 5-year notes, the ratio expands and will form a rising column of X's. When the Treasuries are in control, it will form a descending column of O's.
I'm using a 3 1/4% box size but that is adjustable depending on the time-frame I want. To reduce the impact of trading fluctuations, it takes a reversal of three vertical boxes to create a new column. The numbers and letters in the boxes are months of the year.
The current direction is our first indicator. Is an investment in a column of X's or O's? On this chart, the Dow is in X’s.
The next indicator is whether an investment is showing a pattern of strength or weakness as it cycles through multiple columns. If an investment goes higher than a previous high, that's called a Buy Signal. On this chart, it is marked in green. A Sell Signal is the opposite, shown in red.
It's like watching waves at the beach. For the first few minutes, they look random. After a while, you can tell if the tide is coming in or going out by how far the water reaches.
Like I said in the podcast, a Buy Signal is not a recommendation. It is just a technical term on the chart. These are just two of thousands of possibilities and there's no guarantee that either of them is doing well. One could simply be going down slower than the other.
This next chart is the relative-strength matrix. We use these for hundreds of evaluations. Are small-cap stocks stronger than utilities? Are corporate bonds stronger than Treasuries -- or English pounds or copper? I've got one that's only mid-cap investments. Clicking on a box opens the one-on-one comparison.
This is the tool that lets us really tear into a 401(k) plan menu. I've created a hypothetical retirement plan using ten familiar market indexes. Each box shows the results of a competition between two investments just like our DOW/Treasury matchup and the mirror Treasury/Dow version. "B" for Buy or "S" for Sell in the first letter. "X" for up or "O" for down in the second.
In a couple seconds, the computer calculates 90 individual charts and ranks the results based either on total Buy Signals, total X's or a combination of the two.
At this point we know which available investments are currently stronger than their peers and which have a pattern of increasing strength.
I'm using indexes because you can't buy or sell them. They make good examples without being misconstrued as an investment recommendation.
Your retirement plan has real investments. If they are in our database, we'll also get a technical score that ranks them against thousands of investments for strength against their peers, against competing markets and a couple dozen other metrics.
At a glance, the matrix shows us the current and trending strength of every investment in the plan. The technical score shows how they compare in the larger world. A strong showing in both gives us our preliminary buy list.
If you are rejoining us, we now have a document in hand that tells us which 401(k) investments are worth a second look.
The matrix updates every business day. If we own a sector that has lost or gained enough strength, the computer alerts me. I call my client and say what I want to do in her accounts and that she might want to go online and change her 401(k) allocations.
When we get together, I can treat her retirement assets almost like they were in house. Strong choices are easy to deploy. When there aren't very many of those, we use the plan for what it does well and fill our tactical targets with personal accounts. It doesn't matter where the accounts are -- it's all her money.
I think of retirement accounts as the offensive linemen on a football team. They are big and slow but an important part of the team. We can usually find good core holdings in a plan that we don't have to change very often. Investments that need a closer eye we keep in-house.
More than anything, this is about your confidence. People come to me to help them turn what they have into what they want. We try to make sure all their resources are pointed in the right direction. If it means advising on assets we may never see, that's OK. We are committed to the highest level of service and that means doing what other firms won't. I don't charge clients for this and I don't know of any other advisors in North Carolina who do this for clients.
It's more than buys and sells. Most plans have useable investments but I've run matrices on some real kennels. If the client had other reasons to stay at the job, we lowered the earnings expectations in our financial planning software to see where to make-up the difference.
Let me leave you with this thought:
I had the pleasure of listening to Dick Capalbo a few years back. Dick is a superb advisor to advisors. He told me the most important question a client could ever ask a financial advisor is:
What happens to me if you're wrong?
These plans place investment responsibility on participants. If you choose a risk-based or age-based portfolio, you have made a de facto asset allocation decision that will last until you change it. Right now, you have to answer your own question.
Our research discipline comes at these accounts from a completely different angle. We are independent of the research process and don't have to worry about hurting our own managers' feelings.
Looking for strength means looking for weakness. I think you ought to know.
When I buy a used car, I ask the owner if it's OK to have my mechanic give it a once-over. I was pretty handy with a wrench but I don't know how long the transmission will last or if there are known issues with that model. For a little effort, I get an expert, third-party evaluation. I don't have to rely on my guesses or take the seller's word for it.
If you would do that for a pickup truck, do it for your life savings.
I hope I've given you some useful information for getting your arms around your 401(k). If this makes sense, just give me a call and we'll see what you've got.
The opinions expressed here are those of Helms Wealth management and not necessarily those of LPL Financial or anyone else. This podcast is for informational use only.
Investing has inherent risks which should be carefully considered before investing or sending money.
Charts are courtesy of Dorsey, Wright and Associates and are used with permission. All content is developed from sources believed to be accurate as of the date shown. The indexes shown are the property of their respective owners. You cannot own an index.