One Way To Avoid The Stock Market Busts In Your 401k

There are many ways to successfully climb the investing mountain. But many end up falling over the "investing cliff".

In my newsletters I show you ways to know better times to be in individual stocks and ETFs and better times to be out of them. Today, I want to show you just one way that you can know when it may be a good time to exit mutual funds and ETFs that track the overall market (like an S&P 500 index fund) or funds that are highly influenced by it.

It's very simple really. You see, before I knew anything about fundamental analysis, Elliott Wave counts, measuring investor sentiment, etc. I only knew a few technical indicators and how to successfully use them.

Well today, while I have several indicators on the chart below, we're only going to focus on ONE of those indicators - the 50-week simple moving average (SMA).

This is a strategy that certainly won't "call a top" or "call a bottom", but it can help you to know when the dangers are high and help you to avoid the bulk of the stock market's downtrend.

You see, in my personal opinion, part of your "retirement planning" needs to be avoiding as much of the bear markets as you can, and you'll find that your assets grow so much further than those who don't have a "plan of attack" along these lines. It's something I used in helping my dad with his 401k investing and it's something that I'm going to share with you here today.

Keep in mind, as it concerns your own retirement, if you feel you need to contact a CFP or a retirement specialist at your brokerage firm, feel free to do so. But if you're self-directing your own retirement investments within a 401k or IRA and you're willing to be just a bit more hands-on than the average person, then I believe you can help enhance your long-term returns because of what you don't "give back" to the market when you avoid much of its bear market (downtrend).

The chart I've provided below is from www.stockcharts.com and its free to access. But you can use most any charting provider (like one your broker uses in your trading station) to replicate what I'm going to show you today.

You really don't need anything else on your chart for this strategy except for the (blue) 50-week moving average. All you'll do is choose the "weekly" period and choose a "range" that goes back several years in time, like 5 years.

Once you're on the weekly chart, going back many years in time...you'll choose the "Simple Moving Avg" overlay and in the Parameters box, type in the number 50. (Also, make sure you've got $SPX in the Symbol box). Then click on the Update button and it will add this moving average to your chart.

My chart goes back further in time because I want to show you how this played out in the last two bear markets. So let's take a look at the chart below.

(Click on the chart above to enlarge it.)

When the price drops below the 50-week moving average AND continues to hold there for long enough to where the price starts to hold below the moving average (like its a ceiling to it), and the moving average is beginning to curl lower, you know it's likely time to exit your mutual funds/ETFs that would be tied to or influenced by this market down-draft. (Examples are in the red circled areas on the chart above).

You'll notice that this doesn't dodge ALL of the bear market (because no system will successfully do that), but you certainly miss a TON of the downside by exiting when this happens.

Then the question becomes, "When to get back in?"

The answer to that is when the price of the index starts to trade AND hold above its moving average. (A short-term spike above the moving average doesn't count, in other words).

Once this happens, you can move your money back into these stock mutual funds/index funds. You'll usually find that you're past the bottom in the market and it is generally a safer time to re-enter the market.

In my opinion, this is a great way to dodge a ton of the downside and yet get you back in early enough to enjoy the bulk of the next bull market uptrend.

I write this to you now because we may not be very far from the next bear market downtrend. Therefore, it's a good habit just to keep a tab open on your web browser with this set-up on it and click to update the chart after the close of the stock market on Fridays (after 4pm EST) and you'll have the latest data charted there for you.

If you're willing to do this, I believe you'll very likely fare much better than those who don't. Be pro-active about your wealth and make the time to steward it well and watch it grow better through the years as a result.

In the Bible, God said it this way, "Know well the condition of your flocks, and give attention to your herds."—Proverbs 27:23

If He were saying it to us today, I believe He would be saying, "Know well the condition of your 401k and IRA and give attention to those retirement accounts."

God bless!

Sean - do you have any advice for how to avoid downturns if we have limited options within our 401k? There does not seem to be a cash fund available to park our retirement funds in until its time to re-enter the mutual funds provided. Also, what are your thoughts on blended funds tailored to your expected year of retirement?

Ask your 401k administrator. Don't assume it has no cash or close-to-cash type of option. Make for sure, by asking them. Nope, I'm not a fan of those funds. They're just a mixture of overpriced bonds and overpriced stocks right now. They won't likely protect you.

Make for sure to see what cash-type options you have, if any. Then see what your other choices are. Many 401ks have an option to where you can essentially save and get matching (where offered) without exposure to the stock market. However, all do not offer these. So make sure.

Thank you!


You’re welcome!