401k Alert – Fade April Rally, Move To Safer 401(k) Allocation

This is our inaugural edition of 401k Alert Fund Asset Allocations. It is open to the public as a sample of our work. Visit the 401k Alert description page to learn more about this valuable service.



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401k Fund Mapping

401k plans come with a menu of funds that you can use to build your asset allocation. Our method helps you find the best funds for each category of investment.

By mapping your funds to our models, you can have an easy turnkey approach to plugging in asset allocation suggestions.

The five core categories of ongoing contributions to your retirement plan that we recommend are:

  • Large-Cap Blended
  • Mid-Cap Blended
  • Small-Cap Growth
  • International Developed Markets
  • International Emerging Markets

This is a different approach than most take, however, is very similar to what financial commentator Dave Ramsey suggests. Read our foundation piece 401(k) Fund Mapping for more information.

While there are other asset allocation categories, we use only those five for your ongoing contributions. We use other asset allocation categories for existing retirement plan balances as well, for example (this list is incomplete):

  • Large-Cap Value
  • Mid-Cap Growth
  • Small Cap Value
  • Government Bond
  • International Bond
  • Money Market or Guaranteed Interest Account

The reason that contributions and balances are treated differently is twofold. First, when we have signals that a significant market event might be coming, we will choose to protect your balances short-term with the idea that you will return to a more assertive asset allocation after a stock market correction is over.

Your contributions however, are a sort of dollar-cost averaging (DCA) program. That is, you are adding all the time and simply receiving an average price of acquisition, or cost basis. When the market has fallen, is precisely when you want to be adding to your investments. And, frankly, changing your contributions is a sort of micro-managing that stands little chance at being effective. Keep your contributions simple.

So, while we will manage a larger existing balance in a tactical fashion to avoid significant losses, your ongoing contributions are more strategic and constant in nature.

We exclude sector and country specific funds as most 401(k) retirement plans do not offer those options. However, if you have a brokerage window in your retirement plan and would like a more aggressive strategy, then the Fundamental Trends ETF Tactical Investing service might be for you.

401(k) Contributions

Your ongoing 401(k) contributions are the weekly or bi-weekly amounts contributed to your retirement plan from your paycheck.

Your contributions should remain aggressively positioned at all times. When the stock market drops is precisely when you want to be adding to beaten up categories of investment.

Research demonstrates that the five categories we have identified are the core investments to make in a 401(k) retirement plan. Again, for more, read our piece on 401(k) Fund Mapping.

All types of investors should engage in long-term strategic fund contributions over time. It is your balances that we will tweak periodically to manage your risk. It is those shifts in your asset allocation for your balances that we periodically email 401k Alerts as needed.

Investment CategoryLong-term
Large-Cap Blended20%25%30%
Mid-Cap Blended20%25%30%
Small-Cap Growth30%20%10%
Developed Markets
Emerging Markets

401(k) Balance Asset Allocations – April 2019

The stock market is currently exhibiting an ambiguous set-up. That is, there are no clear signals to an imminent rise or decline for equity prices.

See – A Market In The Middle & Fade The Market In Early April

Core factors that we follow here at Fundamental Trends are measures of money flow into and out of different asset classes. It is most simple to understand the impact of money flow on the market in this way:

When money flow is increasing, that represents increased demand for assets, and thus price tends to rise.

When money flow is decreasing, that represents decreased demand for assets, and thus price tends to fall.

Recently, since December 26th, 2018 to be precise, we have seen rising and steady money flow into the stock markets. That rise in money flow has just flattened.

Historically, the rise in money the first four months of the year has been correlated to retirement plan contributions that come in from employers during the first quarter. Also, there is typically no tax-loss selling early in the year and hedge funds are typically investing as well.

The saying “sell in May and go away” is a seasonal observation that tends to hold in most years. However, it is not without its inconsistencies.

As Merrill Lynch has observed, May tends to show rising returns 57% of the time. This is good, but not great. If May is a loser, then June to August tends to be very good. If May is a winner, then the summer months, particularly from mid-July through September, can be particularly rough.

Our job is to figure out where are now. As I said, the current set-up is ambiguous. There are no clear signals. But, there are clues.

If you haven’t read my article 4 Pieces of Missing Money Crushing Markets on Seeking Alpha, you should do so, as I explain why markets really took a beating in Q4 2018.

What we are faced with now is a market that is focusing on three things:

  • China and U.S. trade deal.
  • Slowing economic growth.
  • Brexit

Yes, there are the long-term debt and other factors, but the news right now is focused on the three things I listed. If any one of those come in negative, we are likely to see money flows at least stall and maybe fall, with a corresponding drop in stock prices. Interestingly, bonds have already priced in a correction and offer little upside from here.

My recommendation to investors is to focus on your real risk tolerance. That requires that you make a unemotional assessment of how you would feel if your equity investments lost 20%, 30% or 50% in coming months.

I illustrated this about the stock market’s ultimate downside over a year ago:

Even though that chart was well ahead of time, it was close on narrowing down what the December bottom would look like.

The evidence suggests, and I believe, that the likelihood that we test the December stock market bottom this year is very high, even if we can’t divine whether the market will rise another 10% before that happens. I also believe there are many factors lining up for a weak second half to 2020.

Thus, I am raising cash in retirement plans because the upside is less than the downside at this point, even if we don’t know if we’ll get a bit more rally first. Here are how the models stand for asset allocations for your retirement plan balances:

Investment CategoryLong-term
Large-Cap Blended20%15%10%
Mid-Cap Blended20%15%10%
Small-Cap Growth15%5%5%
Developed Markets
Emerging Markets
Money Market or
Guaranteed Interest Fund