How Much Can I Contribute To My 401k?

In 2009, those under 50 years old can contribute a maximum of $16,500. If you are 50 or older that increases another $5,500 to a total of $22,000.

An equally important question should be "How should I have the money invested within my 401k?" People over the age of 50 who have accumulated a sizeable 401k balance (usually their largest single investable asset) have experienced tremendous volatility. They have lost between 30% and 50% two different times in the last ten years.

Many are looking for ways to protect what they have already saved while not giving up the potential of growth during good market periods. Friends and acquaintances who know I own a Registered Investment Advisory service ask me all the time "How should I have my 401k invested?" My answer is that my answer will change over time. Today the market might require one type of allocation while a down market will require a completely different allocation. If this friend or acquaintance doesn't see me after my allocations have changed, then they may sit on the wrong allocation during a down market and lose as much as everyone else. Because of this, I will only give advice to people who will follow my recommendatins on a regular basis.

It makes sense to be invested during an up market and be in cash during a down market, right? Who wouldn't want their account to always go up? Obviously it isn't that simple. You must develope a system to tell you the probability of what is to occur next. I have been in this industry since 1992 and have found that tracking cycles (waves) in the market makes the most sense. Cycles occur in everything on this earth. The weather works in cycles, tree rings are in cycles, even the Presidential election creates a 4 year cycle. I have software that runs daily checking to see what the long term and intermediate term cycles are in the market and where we are within them. This has been a wonderful way to decrease risk to 401k accounts while not limiting upside potential.

For more information on this process, go to www.eWatch401k.com

A Newsletter from Dec. '07

The objective of managing your investment account should be: Don't lose in down markets so it is easier to gain in Up markets. The Bible refers to this as "Occupation". You protect what you've already gained and then go out to get more. Militarily you are to never give up what you've already conquered on the promise of gaining more in the future.

Following is a newsletter I sent to my clients in December of 2007, which was near the top of the market. I was notifying them we were going to begin a conservative approach because I thought we could be moving into a recession.

The Market. . . According to John

No Short Term Views

The market was in an overbought condition last week, but the latest pullback has fixed that. At this point, the next short term move is a toss-up. This suits our hedge position perfectly. Yesterday, for example, the Dow was down over 170 points. Most of our acccounts, however, were pretty close to break-even. Today, the market was slightly up, but we enjoyed a very nice increase in account values.

Why hedge? When the market hasn't shown a clear sign what it is going to do next, it would be nice to have positions that will do BETTER than the market if it advances. Since it may also go the other way, it would be nice to have positions that will make us money there as well. By effectively buying positions that help offset each other, we are taking a "Market Neutral" stance. If we are lucky enough to do it right, in an increasing market, our out-performers will beat the market enough that they will pull our hedge positions along well enough to at least match the upward return of the market.

If the market decides to go south, our hedge positions will increase in value and hopefully our stock positions won't go down too dramatically, thus decreasing our overall account value less than the market declines. Properly executed, our hedged portfolio should give us major market return with substantially decreased volatility. The perfect answer for a time when the market is giving us no short term direction.

Intermediate Term: Down

An ominous scenario is potentially setting up. If the market decides to pull back further and break the lows it just set a couple weeks ago (remember the last low broke the lows set this summer) and then immediately spikes up 200 to 400 points -- then look out. This is the pattern that historically has preceeded crashes. I have no idea if this will follow through, but I will definitely be watching.

In the end of November, the Dow broke a major support level before bouncing back (see #1 in Figure 1). The piercing of this major support level changed our long term trend from positive to negative. Now, we would expect any upward movements in the market to top out lower than the high of the last upward movement (notice last top in Figure 1 is lower than previous top). On the same hand, the next low should be lower than the last. Lower highs and lower lows are the definition of a down trend.

Figure 1

Let's look at how the Dow acted through the last recession and compare how it is setting up now. Figure 2 shows how the major lows consistently broke below the low prior to it. These are numbered from 1 to 7. The highs were initially trying to go higher, but were turned away at the previous highs. Eventually they began to top out lower than the previous highs.

Figure 2

Recession Watch

Partial reason for the nice bounce off the support levels last week were news from the Fed. They hyped further liquidity to the financial markets by buying back $40 billion of treasuries (known as "repos"). Unfortunately, the rest of the story is that these were coming due anyway this week. $39 billion of repos were due and will be simply getting a different maturity date. The market finds this out and we get a couple major down days back to back. We've heard the heralding of hundreds of billions being pumped into the market to prop up the ailing financial system. In all reality, only about 18 billion has been added.

The Fed is doing us a great disservice. They are inflating our currency at rates that haven't been seen for 30 years. This results in DECREASING it's value. This causes the economic hangover to be worse when they slow down the inflating process. The opposite of inflating is depressing. Yes, depressions are the natural product of wild, out of control periods of inflating. Historically, the Fed won't let the cycle take it's full course and it will begin inflating again before a full blown depression occurs, causing a mild depression or "recession".
Where do we go from here?

I truly believe we will be taking off long positions soon and replace them with further shorts such as SKK, SKF and MZZ.

Small/Mid Cap Component

The small/mid cap component represents half of our 401k management program. The above returns represent the return you would have experienced in the Fidelity Low Priced Stock Fund had you not used our system vs. if you DID use our system. The period of time represented is the top of the market in Oct '07 until today, Oct 7 '09.

The way our system works:

• Determine which investments in your 401k represent the small / mid cap asset class.
• When we let you know the market is good, invest half of your 401k into one or more of these funds.
• When the status of the market changes, we will notify you. At this point you would switch the small/mid cap funds into the money market.

The entire idea is to protect your 401k in bad markets and capitalize in the good markets.

This system has done exactly that. You don't have to wait years just to break even after a bad market. This system allows you to exercise good judgement as it pertains to your 401k.

401k Allocation

Our 401k allocation system has two components. One is International / Emerging Markets and the other Small / Mid Cap. The chart above is a history of Fidelity Emerging Markets Fund utilizing our International/Emerging component. The line depicts the Fund by itself from October 2007 through today. It is down over 40% in this period of time. The line is red when the system told you to be in cash (money market) and green when it told you to be invested in the emerging markets fund. Had you done as it recommended your investment would have looked like the followingchart:

The flat periods depict while you were in cash and the jagged periods while you were invested in the emerging markets fund. Had you simply held onto the fund you would be down over 40% today but had you utilized this system you would be up over 50%. What a huge difference.

This system was designed in the mid '90s so the results are real. Not backtested.

If you're interested in looking further at this service goto http://www.ewatch401k.com or simply click on the rescue helicopter in the left margin.

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.