The Defined Contribution Plan, most commonly known as the 401k plan, is a perfect platform for the application of technical analysis. What you should know is the main menu of investment options in your plan consist of products. Each of these products is a portfolio of assets. The assets in each portfolio are selected on the basis of predetermined criteria which is available in the Offering Document called a Prospectus. The detailed description of the investment selection process can be found in the section titled “Principal Investment Policies and Practices.” In this section, there is generally a discussion of how the fund manager or managers use fundamental analysis to select the assets they buy inside the fund. Therefore, it is not practical, if at all possible, for a plan participant to rely on his or her own ability to undertake fundamental analysis of the fund’s assets.

The key here is that the fund and fund manager assume you know one critical fact. That fact is that the manager assumes YOU understand what you are buying. If you choose a fund in your 401k that has a specific focus on developing markets, for example, the manager assumes you know when those markets are generally rising in price or are generally falling in price.

Yes, the manager is likely well aware of these conditions; however, because of the fund focus, what you bought, a fund to give you exposure to developing markets, the manager will not time the markets and convert the portfolio to a sizable cash position nor generally limit the downside risk. It is the fund’s position you are not paying them to manage a portfolio of cash until such a time as the markets they invest in will support higher prices.

The manager assumes you will hedge your own total portfolio, or not. So the question to ask is do you want a personal investment policy that is content with being fully invested at all times and in all markets regardless of any decline in the value of your 401k assets? What has this buy and hold, hands off, set it and forget it investment strategy cost the plan participant?

Let’s Look at the cost of the problem.

This is what a set it and forget it strategy cost in the last market meltdown. How did this feel to you? If you are like anyone else, this was not pleasant. Did you go for any length of time simply not opening your 401k account statement as a way to deal with this fact? The truth is this has happened before, remember? That one was called the Technology bubble.

If you are looking at your own 401k statement and think that your account has recovered from the “Liquidity Crisis” as it has been called, don’t forget to subtract the additional money you and your employer contributed to the account in the years following the crash. Sorry.

There is a branch of technical analysis called “Relative Strength” analysis that has the ability to alert the 401k investor to one critical piece of information. It helps answer the question Wall Street does not want you to ask…

Is this a market worthy of my investment capital, today?

If the relative strength analysis indicates that cash is outperforming all other investments then cash becomes an asset class itself. There is no reason not to protect your retirement assets. You really do not have to ride the markets up and down

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