Can 401k Investment Advice Eliminate the “Lottery Effect?”

Let’s be clear on the Lottery Effect.Lotto Prayerphoto © 2010 Seth Anderson | more info (via: Wylio) In so far as no one can really tell you with absolute certainty the value of the stock market at the time you actually retire, there is the possibility that it may be lower than when you made your contributions. Yet, the assumption is always that the value of your portfolio will be higher when you retire.

If we are to be honest, regardless of similar savings patterns, plan participants may well experience different retirement outcomes for no other reason than when they began making contributions to their 401k plan and how they managed their investment portfolio. Without risk management, so much of retirement outcomes are left to chance.

If you do not believe the Lottery Effect, think about the plan participant whose scheduled retirement date was March of 2008. Still not convinced, how about the plan participant who retired ten years ago planning to live off the interest income on a tax-free municipal bond portfolio.

In the first case, the plan participant may well have delayed retirement because of the liquidity crisis and subsequent market crash. In the second case, the plan participant may have to work a part-time job to make up for the decline interest income because rates fell. I cannot believe either of these people is feeling particularly lucky.

One of the ways to challenge the Lottery Effect is to actively manage the investment risk in your retirement portfolio. If you engage in a set-it-and-forget-it investment strategy you will be subject to the Lottery Effect. Fortunately, for today’s plan participants, online tools are available that had only been available to professional money managers.

If you are willing to manage investment risk on your own search the term “stock market technical analysis.” In my opinion the easiest to learn and understand is Point and Figure Charting.

Using this methodology in combination with relative strength analysis, any investor, alone or with professional 401k investment advice, could have avoided the worst of the two market meltdowns in the last ten years.

The idea is not to get out at the top or to get back in at the bottom. The idea is to avoid catastrophic losses.

This is your serious money. Do not play the Lottery with your retirement

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