The Big 401(k) Investment Lesson of 2011

The biggest investment lesson of 2011: Why another burst bubble underscores the need for diversification.

Entering 2011, the International mutual funds in your Minnesota company 401(k) retirement plan were promoted to be a great place to be invested in the New Year.

Most stock market experts were falling all over themselves this time last year with both written and spoken recommendations for all mutual funds invested in companies located outside of the United States.

Part of the “talking points” late last year were that the current economic slowdown in the U.S. was going to make international stocks and international stock mutual funds a better investment alternative than U.S. mutual funds in 2011.

Beginning in March of this year, that investment bubble burst in a big way. Since that time, international mutual funds have led the way down during the recent stock market correction.

The ownership of a broad list of your company 401(k) retirement plan mutual funds is called strategic asset allocation. This investment management strategy invests a small percentage of your individual company retirement plan account into several of the available mutual funds in your company retirement plan menu.

Your buy-and-hold ownership of these company 401(k) retirement plan mutual funds is promoted by company retirement plan providers in order to keep you “diversified.” Diversification is part of a strategic asset allocation strategy.

The investment results coming up later this month for year-end 2011 will be the latest example of how a diversified portfolio of company retirement plan mutual funds has failed individual company retirement plan participants.

The amount of money lost on international mutual fund options in company retirement plans this year has been huge.  By far, these kinds of mutual funds have been the worst place to be invested in 2011.

The hard investment management truth is that if you own any mutual fund at the wrong time, it can cost you tens of thousands of company 401(k) plan account dollars.

Common sense in all other parts of life tells you to avoid any event that has the potential for personal loss.  For most individual company retirement plan participants, that same common sense does not apply in the “diversification” of their company retirement plan account.

Many times the ability to “make money” in your company 401(k) retirement plan account comes not the investments you own, but instead from the investments you don’t own. In 2011, the best example of that investment management lesson has been the "diversification" into the international mutual fund options in your company retirement plan account.

Individual company retirement plan participants have lost more money trying to own international mutual funds in 2011 than they have gained trying to own U.S. stock mutual funds.

One of the big investment lessons in 2011 should be this very important investment management concept.  That is, regardless of what a computer-generated pie chart thinks you should own in your company 401(k) retirement plan account, you should only remain invested in the kind of mutual funds that are going up in value.

Ric Lager
Lager & Company, Inc.

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