Almost exactly 1 year ago I decided to change the allocations of my new capital contributed to my 401(k) from a balanced mix of funds to 50% cash to build up a stock pile of money to deploy when, not if, a correction occurred. In addition, I took 10% out of equities and put it in cash as well. The move had been on my mind for a while and when I saw another blogger’s post about some very real statistics regarding then CAPE/PE10 levels I decided to act. I laid out the exact risk/reward,
The risk is clear – the market keeps RIPPING upwards and I miss out on most of that growth (I still have some future contributions going to equities and I only took some off the table), however, the other side of the coin is pretty clear also that there is a pull back and I’ll have some cash to invest.
The problem with getting out of the market is knowing when to get back in, so I am going to give my self a point to start deploying cash…after a 5% correction (from this point – so the S&P would be at 2,318 or so). If it does not occur by year’s end I will reevaluate the strategy.
After a year I decided to change where the future contributions are invested. I am going to leave the small amount of cash I have squirreled away for the correction that eventually has to happen (at least I think it does).
Why am I Changing my Allocation?
Despite the CAPE ratio being even higher than it was last year when I made the decision, the broad market keeps going up as well! So it got me to thinking about the gains I have missed out trying to time the market. Those gains will continue to compound throughout the next few decades before I am even allowed to touch this account. Worse yet, the cash I have put to the side has not even made a dent in the overall allocation of the portfolio since the market keeps climbing while the cash does not.
As such, I decided that it is time to reevaluate and put future contributions back to work. At some point, I’ll absolutely put the cash to work if/when there is a pull back, but until then I’ll just let it sit there.
My New Allocation for Current 401(k) Contributions
My 401(k) is terrible. I have limited fund choices with high fees. I get a pretty decent match, so as they say, it is what it is! I have already made the decision that I am not going to reallocate the current balance, rather, I am going to try and shift the portfolio to my desired asset allocation via new contributions. As such, the first step in this process is to determine my current allocation since this can provide some indication of if future contributions in certain funds should be heavier.
Current 401(k) Allocation
I have always liked Morningstar’s instant X-Ray tool to evaluate a simple portfolio.
Actually, I am pretty comfortable with the asset allocation break down (~84% stocks, 9% Bonds and 7% Cash). 84% equities may seem high, but I can’t/won’t touch this account for a few decades. Secondly, if we were to take a look at my entire financial world my asset allocation would probably be a little less equity heavy as compared to looking at just this account. Specifically, I have a pretty healthy emergency cash account, as well as very safe and stable permanent whole life policies that I look at as my bond alternative.
However, when we look a little deeper at the holdings themselves the 84% of the account starts to look a little different than I would like. As stated earlier, I am going to leave the funds I already have invested, and instead use new money to get myself to a point where I am comfortable for a few more years.
Reallocating New Contributions
First, the easiest decision is to reduce my cash allocation from 50% to 10% – which has a .94% expense ratio somehow! Similarly, I am going to keep my bonds at 10% total as well (5% World Oppenheimer International Bond Fund and 5% Oppenheimer Global Strategic Income Fund). With the rest of 80% for new contributions I am going to split them as follows:
- 20% Oppenheimer Value Fund
- 20% – Oppenheimer Mid Cap Value
- 30% – American Funds Growth Fund
- 10% – Oppenheimer Global Opportunities Fund
Reallocating and Rebalancing your Qualified Accounts
Reallocation and balancing of your 401(k) or other qualified account is a great exercise that most people ignore. Sometimes this is for the better, and sometimes it can sorely hurt the participant. I think this recent reallocation of will take me another year or so, when I can come back and rebalance the account. The only thing that I could see changing in the near term would be if we finally get a correction and I can deploy the cash into it (but that would only be adding an additional 5 to 7% of assets into play at this point).