Many people don’t have a strategy to make the most of their employer’s retirement plan, and generally won’t view the recent market correction as the ideal time to make extra money. However, a simple, low-risk approach can be just the thing to position you for future financial growth.
The following approach may not be for everyone and you need to do your own research and due diligence —including seeking professional advice — before simply jumping on the band wagon.
Everyone knows a key to successful investing is to buy low and sell high, but how do you do it in your company retirement plan; and do it without taking on a bunch of risk or making trades every week?
The answer is by directing a portion of your contributions to underperforming assets.
When it comes to company retirement plans, I break them into two separate components that can be managed differently from each other.
- What’s already in there (your existing account balance)
- What you’re putting in every month (your regular contributions)
It’s an important distinction because the amount you put in every month is typically much less than the amount that is already in there, making your regular contributions the lower-risk option for buying low and selling high later.
Most people have never been advised to look at their retirement plan savings this way. Instead, they’re simply given a risk tolerance questionnaire and encouraged to allocate both their existing balance and new contributions into the same buckets.
The issue with this approach is twofold. First, it doesn’t allow you to take advantage of current market conditions and, secondly, it underutilizes the main benefit of 401(k) style investing, which is called dollar cost averaging. Putting this into the context of today’s market, we know that right now anything related to oil, China, and even technology is underperforming.
One might initially think these are investments to stay away from, and that may be the case with your larger existing balance; but it may not be so with your future contributions. By allocating a portion of your smaller contributions to troubled or falling areas of the market, you are buying low.
For example, emerging markets have been under pressure due to China’s recent stock market performance, global growth concerns, and a strong dollar. In other words, these stocks are on sale. The problem is, we don’t know how long the sale will last, which is where dollar cost averaging comes in. By simply allocating a specific amount of every future contribution towards one or more of these “distressed” funds, you will continually be buying low until it finally bottoms out and bounces up. Since you will be doing this over a period of time (perhaps six months to a year or longer) you avoid the pain and pressure of trying to guess the perfect bottom to invest a lump sum.
This strategy is not as sophisticated as it may sound. If, for example, you are allocating $100 per month toward an emerging markets fund costing $10 per share this month, you’ll be purchasing 10 shares. Then, let’s say the following month things get worse and it’s down to $9 per share. With the same $100 you’ll be purchasing 11.1 shares. If the trend worsens and heads even lower, to say $6 per share, you might start wondering, what’s the benefit here? Well, it’s because you’ll now purchase 16.6 shares with the same $100. Thus, over three months you’ve invested $300 to continually buy low and in the process picked up 37.7 shares at an average cost of $7.95 per share.
It’s possible that over the course of several months that stock price might fluctuate, say up to $7 one month and then back down again the next. But that’s okay, because you are patiently investing in the ugly duckling until it emerges into a swan once again … which history tells us it will eventually do.
The overarching goal here is to use small regular contributions to buy underperforming assets on the dip and wait for them to climb back above your average price paid. Then you can decide to either keep contributing or opt to leave those funds alone (treating them like your other existing balances) and redirect that $100 to a different underperformer and once again start buying low.
