Tuesday, September 22, 2009

Empower Your 401k

have you ever received your 401k statement in the mail and without even opening it put it in the file pile? Being in the investment business I speak with people all the time who have no idea how to invest their 401k. Most of them have many investment options to choose from but have no idea which ones to use or not to use.

After years of being asked "what should I be doing with my 401k?" I finally decided to create a solution. The idea for the solution came from a website that had over 5000 subscribers. The developers of the site had created a "Mechanical Investment System". This system took risk out of market in downturns without taking the opportunity for good returns in up markets. These people didn't address the 401k issue but I was highly impressed with their approach. The mechanical approach took all the emotion out of the decision to invest. This only made too much sense so I started on a journey duplicate their effort but have it focus on people's 401k plans.

This idea hit me in 2006. Learning to duplicate their effort would require my learning to write computer programs. Fortunately for me this was what I studied in college so many years ago. I had already spent the last 14 years as an investor and now I had the opportunity to learn programming all over again! What a pleasant surprise to how advanced the programming languages are today compared to then!

After at least a couple thousand hours (no kidding) of learning coding and it's relationship to stock market data I had a good idea what worked and what didn't. I realized many things along the way. Some people build mechanical investment systems that "Fit the market". This is called Curve fitting. These programs have backtest results that look astounding but don't work in whatever kind of market that is coming up next. What is next is the only thing that matters in the world of investing. Everybody gets caught up buying what did best LAST only to buy it and find it is the worst thing for what was next.

Mechanical Investment Systems that are robust (work in any kind of market) are those that were tested using many different types of markets and "Walked Forward". Whenever you build a system you want to test it on one type of market then on another and then another. You "Walk Forward" through time and different markets to see how it would have worked AFTER it was designed.

I built this exact type of system to help people manage their 401k. The site is at http://www.ewatch401k.com/. The algorithms used were actually developed back in the mid '90's. This gives plenty of time and opportunity to see how it has performed since. In fact in the last 10 years it has returned over 15% compound annual return. It was down only 5% in 2008 when the general market was down over 40%.

I will detail more about this system in future posts but it is online and ready to be used.