When Looking At Your 401k Options, What is the First Question To Cross Your Mind?

The first question to inevitably cross your mind when looking at your 401k options is right where Wall Street wants it: Where do I invest my money? We have all been conditioned to think this way. This article will give you a different perspective on approaching your 401k options and investing in general.

Consider the question: Where do I invest my money?

Now, consider this question:

Is this a market worthy of my investment capital?

The first question presumes that every day is a good day to buy investment products. It is just a question of picking the correct one. The second question, the one Wall Street does not want you to ask, presumes there are markets that will not support rising prices. But, yes, says Wall Street; but, no one can predict bull and bear markets!

Again, Wall Street is correct, but the issue is not predicting bull and bear markets. The issue is ARE we in a bull market or a bear market ~ today. ARE we in a market that can support higher prices? To put it another way, is demand in control of the market or is supply in control of the market ~ today?

Think that answer cannot be determined? Think it is too complicated? Congratulations, you are once again being influenced by Wall Street. Yes, it can be determined; and, no, it is not so complicated. The tools to do just that were already being used by Charles Dow (of the Dow Jones Industrial Average) well before the passage of The Securities Acts of 1933 and 1934. Remember, this was at a time when public companies were not required to disclose anything about their operation to the investing public

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Dow determined that he could chart prices which would tell him if supply or demand was in control of a particular stock he was following. The benefit of this focus was that regardless of the rumor of the day the price would tell the true story. The same is true today.

"The price movements, therefore, represent everything everybody knows, hopes, believes and anticipates. Hence, there is no need to supplement the price movements, as some statisticians do, with elaborate compilations of commodity price index numbers, bank clearings, fluctuations in exchange or anything else. The price movements themselves reflect all these things, and therefore an understanding of the price movements of the market." -Charles Dow

The method was refined in 1955 by Abe Cohen. Cohen was the first editor of ChartCraft, which later became Investors Intelligence. He developed an unambiguous index called the NYSE Bullish Percent Index. It measures the percentage of stocks traded on the NYSE that are on what are called “Point & Figure Buy Signals”. Two significant levels are when the NYSE Bullish Percent is above 70% (overbought) and below 30% (oversold). The index suggests greater risk when above 70% and lesser risk when below 30%. In other words when the media, reporting on the bullish enthusiasm of the markets, the index dispassionately suggests caution; and, when the media, reporting the gloom and doom of the markets, the index dispassionately suggests optimism.

Taking the Bullish Percent concept to the next level by virtue of the computer power available today, we can now calculate the relative strength of any investment alternatives. By comparing every asset class, including money market asset, we can determine the answer to the question: Is this a market worthy of my investment? If money market assets are outperforming all other assets classes ~ today ~ then the answer is clearly no. In which case, cash itself should be considered an asset class.

This is precisely what happened on 03/10/2008 when money market began outperforming the S&P 500 index after 1,740 days of the S&P 500 index outperforming money market assets. Do you think you would have benefited knowing this information? Would you have reexamined your 401k options? Would you have benefited by adjusting your asset allocation strategies to 20%, 30% or more to money market? Just know that today is not always a good day to buy investment products. Remember that the key to long term investment success is to avoid catastrophic losses. The tools are out there.